Item 1A. Risk Factors.
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the following factors, as well as other information contained in this Annual Report on Form 10-K, in evaluating our Company and business. If any of the following risks occur, our business, results of operations, and financial condition may be materially adversely affected.
Risks Relating to Our Business and Industry
The global COVID-19 pandemic has had a material detrimental impact on our business, financial results and liquidity, and such impact could worsen and last for an unknown period of time.
The global spread of the COVID-19 pandemic has been severe and rapidly-evolving, with governments, public institutions and other organizations imposing or recommending, and businesses and individuals implementing, restrictions on various activities or other actions to combat its spread. These restrictions include limitations and bans on travel or transportation; limitations on the size of gatherings; closures of work facilities, public buildings and businesses; cancellation of events, including trade shows, conferences and meetings; and quarantines and lock-downs. The pandemic and its consequences forced us to cancel or postpone a substantial portion of our event calendar for 2020 and the first half of 2021. These cancellations and postponements have had, and will continue to have, a severely negative impact on our business, operations, and financial results. The extent to which the ongoing pandemic continues to impact our business, operations, and financial results, including the duration and magnitude of such effects, will depend on numerous evolving factors that we may not be able to accurately predict or assess, including the duration and scope of the pandemic; the negative impact it will have on global and regional economies and economic activity, including the duration and magnitude of its impact on the industry sectors in which our trade shows, conferences and other events operate; its short and longer-term impact on our customers’ marketing, advertising or procurement budgets and their willingness or ability to travel to our events; actions that federal, state and local governments take in response to the pandemic, including limiting or banning travel and large gatherings; quarantine requirements; effectiveness and distribution of vaccinations; and how quickly economies, travel activity, and demand for face-to-face trade shows, conferences and other events recover after the pandemic subsides.
More specifically, the COVID-19 pandemic has subjected our business, operations and financial condition to a number of risks, including, but not limited to, those discussed below:
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COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, as well as reactions to future pandemics or resurgences of COVID-19, could also precipitate or aggravate the other risks we face, which in turn could materially adversely affect our business, financial condition, liquidity, results of operations (including revenues and profitability) and/or stock price. Further, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not consider to present significant risks to our operations. In these dynamic circumstances, there may be developments outside our control requiring us to adjust our operating plan.
During 2020, we recorded noncash adjustments to our recorded asset balance for certain intangible assets, and we may be required to record further such adjustment in future periods that could significantly impact our operating results.
Our balance sheet includes significant intangible assets, including trade names, goodwill and other acquired intangible assets. The determination of related estimated useful lives and whether these assets have been impaired involves significant judgment and subjective assessments, including as to our future business performance, and is subject to factors and events over which we have no control. The continued impact of COVID-19 on our business, slower growth rates, the introduction of new competition into our markets or other external or macroeconomic factors could impair the value of our intangible assets if they create market conditions that adversely affect the competitiveness of our business. Further, declines in our market capitalization may be an indicator that the carrying values of our intangible assets or goodwill exceed their fair values, which could lead to potential impairments that could impact our operating results. For the year ended December 31, 2020 we recorded non-cash goodwill impairments of $603.4 million and non-cash intangible asset impairments of $60.9 million and $15.9 million for certain trade names and certain customer relationships, respectively. For the year ended December 31, 2019, we recorded non-cash goodwill impairments of $69.4 million and non-cash intangible asset impairments of $8.7 million and $8.3 million for certain customer relationships and certain trade names, respectively. There can be no assurance that we will not record further impairment charges in future periods.
The success of each of our trade shows depends on the reputation of that show’s brand.
Our exhibitors and attendees primarily know us by the names of our trade shows that operate in their specific industry sector rather than by our corporate brand name, Emerald. In addition, a single brand name is sometimes used for shows that occur more than once a year; for example, the brand name “ASD Market Week” is used at our ASD Market Week March and ASD Market Week August shows, the brand name “NY NOW” is used at our NY NOW Summer and NY NOW Winter shows, and the brand name Outdoor Retailer is used for the Outdoor Retailer Summer Market and Outdoor Retailer + Snow Show versions of the show. If the image or reputation of one or more of these shows is tarnished, it could impact the number of exhibitors and attendees attending that show or shows. A decline in one of our larger shows could have a material adverse effect on our business, financial condition, cash flows and results of operations.
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The dates and location of a trade show can impact its profitability and prospects.
The demand for desirable dates and locations for our trade shows is high. Consistent with industry practice, we typically maintain multi-year non-binding reservations for dates at our trade show venues. Aside from a nominal deposit in some cases, we do not pay for these reservations, and, while they generally entitle us to a last look before the venue is rented to a third party during the reservation period, these reservations are not binding on the facility owners until we execute a definitive contract with the owner. We typically sign contracts that guarantee the right to specific dates at venues only one or two years in advance. Therefore, our multi-year reservations may not lead to binding contracts with facility owners. Consistency in location and all other aspects of our trade shows is important to maintaining a high retention rate from year to year, and we rely on our highly loyal customer base for the success of our shows. Moving major shows to new cities, such as the move of Outdoor Retailer from Salt Lake City, Utah to Denver, Colorado in January 2018, can adversely affect customer behavior. Similarly, significant timing and frequency changes, such as the move of Outdoor Retailer Winter Market from November 2019 to January 2020 and the shift from a three-show to two-show format for Outdoor Retailer in 2019, can also result in unanticipated customer reactions. External factors such as legislation and government policies at the local or state level, including policy related to social, political and economic issues, may depress the desire of exhibitors and attendees to attend our trade shows held in certain locations. Our inability to secure or retain desirable dates and locations for our trade shows could have a material effect on our business, financial condition, cash flows and results of operations.
Attendance at our shows could decline as a result of disruptions in global or local travel conditions, such as congestion at airports, the risk of or an actual terrorist action, adverse weather or fear of communicable diseases.
The number of attendees and exhibitors at our trade shows may be affected by a variety of factors that are outside our control. Because many attendees and exhibitors travel to our trade shows via airplane, factors that depress the ability or desire of attendees and exhibitors to travel to our trade shows, including, but not limited to: an increased frequency of flight delays or accidents; outbreaks of contagious disease, such as the COVID-19 pandemic; increased costs associated with air travel; actual or threatened terrorist attacks; the imposition of heightened security standards or bans on visitors from particular countries outside the United States; or acts of nature, such as earthquakes, storms and other natural disasters, could have a material adverse effect on our business, financial condition, cash flows and results of operations. For example, in addition to the impact of the COVID-19 pandemic, we experienced disruptions to ISS Orlando, Surf Expo and ICFF South Florida during the third quarter of 2017 as a result of the impact of Hurricane Irma, cancelled ISS Orlando and Surf Expo during the third quarter of 2019 as a result of Hurricane Dorian, and may be forced to cancel or re-locate future trade shows in the event of other natural or man-made disasters. While we are generally insured against direct losses resulting from event cancellations due to circumstances outside of our reasonable control, one or more of the factors described above could cause a long-term reduction in the willingness of exhibitors and attendees to travel to attend our trade shows, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
We may fail to accurately monitor or respond to changing market trends and adapt our trade show portfolio accordingly.
Our success depends in part upon our ability to monitor changing market trends and to adapt our trade shows, acquire existing trade shows or launch new trade shows to meet the evolving needs of existing and emerging target audiences. The process of researching, developing, launching and establishing profitability for a new trade show may lead to initial operating losses. While we did not launch any new in-person events in 2020 due to the impact of COVID-19, we launched five new events in 2019, and expect to continue to launch new events in future periods. Our efforts to adapt our trade shows, or to introduce new trade shows into our portfolio, in response to our perception of changing market trends, may not succeed, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
If we fail to attract leading brands as exhibitors in, or high-quality attendees to, our trade shows, we may lose the benefit of the self-reinforcing “network effect” that many of our shows enjoy today.
The leading brands represented by our exhibitors attract attendees who, in many cases, have authority to make purchasing decisions, or who offer other benefits (such as publicity or press coverage) by virtue of their attendance. The presence of these exhibitors and attendees creates the self-reinforcing “network effect” that benefits our
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business; however, if representatives of leading brands decide for any reason not to participate in our trade shows, the number and quality of attendees could decline, which could lead to a rapid decline in the results of one or more trade shows and have an adverse effect on our business, financial condition, cash flows and results of operations.
We may not fully realize the expected results and/or operating efficiencies associated with our strategic initiatives or restructuring programs, which may have an adverse impact on our business.
We depend on our ability to evolve and grow, and as changes in our business environment occur, we may adjust our business plans by introducing new strategic initiatives or restructuring programs to meet these changes. Recently introduced strategic initiatives include our efforts to: (i) implement event plans to standardize marketing and sales planning across our event portfolio, (ii) introduce value-based pricing in order to improve transparency and customer satisfaction while driving yield improvement, and (iii) enhance our data analytics capabilities to develop new commercial insights. If we are not able to effectively execute on our strategic initiatives, if we do not adequately leverage technology to improve operating efficiencies or if we are unable to develop the data analytics capabilities needed to generate actionable commercial insights, our business performance may be impacted, which may negatively impact our financial condition and results of operations.
We may face increased competition from existing trade show operators or new competitors.
Although the trade show market is highly fragmented, we currently face competition in certain of our industry sectors. Further, our high profit margins and low start-up costs could encourage new operators to enter the trade show business. Both existing and new competitors present an alternative to our product offerings, and if competition increases or others are successful in attracting away our exhibitors and attendees, it could have a material adverse effect on our business, financial condition, cash flows and results of operations.
A significant portion of our revenue is generated by our top five trade shows.
We have historically depended on our top five trade shows to generate a significant portion of our revenues. For the year ended December 31, 2019, which is the last year in which our operations were not negatively impacted by the COVID-19 pandemic, our top five shows were KBIS, ASD Market Week March, ASD Market Week August, Outdoor Retail Summer Market and NY NOW Summer. For the year ended December 31, 2020, these shows represented 19.3% of our total revenues. For the year ended December 31, 2019, these shows represented 29.8% of our total revenues. Notwithstanding the fact that ASD Market Week and NY NOW represent multiple product categories and that all of our top five shows are highly diversified by customer, a significant decline in the performance or prospects of any one of these significant trade shows could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our exhibitors may choose to use an increasing portion of their marketing and advertising budgets to fund online initiatives or otherwise reduce the amount of money they have available to spend in connection with our trade shows.
Our trade shows generally have high NSF renewal rates, and we expect to continue to derive the substantial majority of our revenues from selling booth space to exhibitors. Although we have not observed a decline in demand for our trade shows as a result of the increasing use of the internet and social media for advertising and marketing, the increasing influence of online marketing and any resulting reductions of the budgets our participants allocate to our trade shows could have a material adverse effect on our business, financial condition, cash flows and results of operations.
The PlumRiver Acquisition presents business, financial, and integration risks.
On December 31, 2020, we completed the PlumRiver Acquisition. The PlumRiver Acquisition expands our business into a new business line through its Elastic Suite software-as-a-service technology with digital commerce capabilities, which involves a number of financial, accounting, managerial, operational, integration, compliance and other risks and challenges. The PlumRiver Acquisition entails important risks, including the risk that the PlumRiver business could under-perform relative to our expectations and the purchase price for the acquisition or not perform in accordance with our anticipated timetable, or we could fail to operate such business profitably; the risk that we
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are unable to successfully integrate PlumRiver’s operations and employees and realize its benefits, including the potential impact of the consummation of the proposed transaction on relationships, including with customers, employees and competitors; changes in general economic, business and political conditions which affect the PlumRiver business, including significant competition in the marketplace.
We intend to continue to be acquisitive, and our acquisition growth strategy entails risk.
Our acquisition growth strategy entails various risks, including, among others:
• the risk of overpaying for a particular acquisition;
• the risks relating to potential unknown liabilities of acquired businesses;
In furtherance of our strategy of growth through acquisitions, we routinely review and conduct investigations of potential acquisitions, some of which may be material. When we believe a favorable opportunity exists, we seek to enter into discussions with target shows or sellers regarding the possibility of such acquisitions. At any given time, we may be in discussions with one or more counterparties. There can be no assurances that any such negotiations will lead to definitive agreements, or if such agreements are reached, that any transactions would be consummated
We rely on digital media and print publications to stay in close contact with, and market to, our existing event audiences.
Our ability to effectively engage with target audiences for our events depends in part on our ability to generate engaging and informative content for our other marketing services, including our digital media and print publication properties. The media industry is highly competitive and continues to evolve rapidly, with an increasing number of alternative methods for the production and delivery of content. If we are unable to generate timely and relevant content for our audiences, exploit new and existing technologies to distinguish our digital media and print publications from those of our competitors, or adapt to new distribution methods in order to provide enhanced user experiences, both our other marketing services and event revenues could decline, which may have a material adverse effect on our business, financial condition, cash flows and results of operations.
A loss or disruption of the services from one or more of the limited number of outside contractors who specialize in decoration, facility set-up and other services in connection with our trade shows could harm our business.
We, and to a greater extent, our exhibitors, use a limited number of outside contractors for decoration, facility set-up and other services in connection with our trade shows, and we and our exhibitors rely on the availability, capability and willingness of these contractors to provide services on a timely basis and on favorable economic and other terms. Notwithstanding our long-term contracts with many of these contractors, many factors outside our control could harm these relationships and the availability, capability or willingness of these contractors to provide these services on acceptable terms. The partial or complete loss of these contractors, or a significant adverse change in our or our exhibitors’ relationships with any of these contractors, could result in service delays, reputational
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damage and/or added costs that could harm our business and customer relationships to the extent we or our exhibitors are unable to replace them in a timely or cost-effective fashion, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
In addition, some facilities where we hold our trade shows require decorators, facility set-up and other service providers to use unionized labor. Any union strikes or work stoppages could result in delays in launching or running our trade shows and other events held at such facilities, reputational damage and/or added costs, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
The industry associations that sponsor and market our trade shows could cease to do so effectively, or could be replaced or supplemented by new industry associations who do not sponsor or market our trade shows.
We often enter into long-term sponsorship agreements with industry associations whereby the industry association endorses and markets our trade show to its members, typically in exchange for a percentage of the trade show’s revenue. Our success depends, in part, on our continued relationships with these industry associations and our ability to enter into similar relationships with other industry associations. Although we frequently enter into long-term agreements with these counterparties, these relationships remain subject to various risks, including, among others:
Any disruptions or impediments in these existing relationships, or the inability to establish a new relationship, could have a material adverse effect on our business, financial condition, cash flows and results of operations.
We do not own certain of the trade shows that we operate or certain trademarks associated with some of our shows.
The risks associated with our relationships with industry trade associations or other third-party sponsors of our events are particularly applicable in the case of KBIS, which is owned by the National Kitchen and Bath Association, and in the case of CEDIA and our Military trade shows, which are the trade shows in our portfolio where the show trademarks are owned by an industry association or other third party and not by us. Any material disruption to our relationship with these third parties could have a material adverse impact on the revenue stream from these trade shows.
The infringement or invalidation of proprietary rights could have an adverse effect on our business.
We rely on trademark, trade secret and copyright laws in the United States and on company policies and confidentiality agreements with our employees, consultants, advisors and collaborators to protect our proprietary rights, including with respect to the names of our trade shows, our exhibitor and attendee contact databases and other intellectual property rights. Our confidentiality agreements may not provide adequate protection of our proprietary rights in the event of unauthorized use or disclosure of our proprietary information or if our proprietary information otherwise becomes known, or is independently developed, by competitors. Failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business. We rely on our trademarks, trade names and brand names to distinguish our trade shows from those of our competitors, and have registered and applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved or that our federal registrations will be upheld if challenged. Third parties may oppose our applications or otherwise challenge our use of our trademarks through administrative processes or litigation. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products
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and/or services, which could result in the loss of brand recognition and could require us to devote resources to advertising and marketing new brands, and we may face reputational damage and incur costs associated with defending any such oppositions or litigation. Further, we cannot assure you that competitors will not infringe upon our trademarks, or that we will identify all such infringements or have adequate resources to properly enforce our trademarks.
We face risks associated with event cancellations or other interruptions to our business, which the insurance we maintain may not fully cover.
We maintain business interruption, event cancellation, casualty, general commercial and umbrella and excess liability insurance, as well as policies relating to workers’ compensation, director and officer insurance, property and product liability insurance, and cyber security insurance. Our insurance policies may not cover all risks associated with the operation of our business and may not be sufficient to offset the costs of all losses, lost sales or increased costs experienced during business interruptions or event cancellations. For example, in addition to the ongoing impact of the COVID-19 pandemic, we experienced disruptions to ISS Orlando, Surf Expo and ICFF South Florida during the third quarter of 2017 as a result of the impact of Hurricane Irma, cancelled ISS Orlando and Surf Expo during the third quarter of 2019 as a result of Hurricane Dorian, and we may be forced to cancel future trade shows in the event of other natural or man-made disasters. Our recent claims history, combined with the increased frequency of natural disasters due to climate change or other factors, has resulted in increased event cancellation insurance premiums, and we cannot guarantee that such premium increases will not continue in the future or that event cancellation insurance will be available to effectively cover all of our businesses. In addition, many of our trade shows are held in government-owned facilities, including three that are held on military bases operated by the U.S. government. These governmental entities may have the right to exclude us from the venues, or may not give us executed venue contracts until immediately prior to a scheduled trade show. While we are insured against losses arising from event cancellations, we are not reimbursed for any property that is discarded or destroyed or that we are required to replace because our existing assets are temporarily inaccessible. Such losses could have a negative impact on our business.
Certain events can also lead to reputational harm which could have a long-term negative impact on a trade show that would not be mitigated by insurance coverage. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance policies may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew our insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. Losses and liabilities from uninsured or underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our financial condition and results of operations.
Risks Relating to our Indebtedness
Our significant indebtedness could adversely affect our financial condition and limit our ability to raise additional capital to fund our operations.
We have a significant amount of indebtedness. As of December 31, 2020, we had $525.2 million of borrowings outstanding under the Amended and Restated Term Loan Facility, with $149.0 million in additional borrowing capacity under the Amended and Restated Revolving Credit Facility (as defined below) (after giving effect to $1.0 million of outstanding letters of credit).
Our high level of indebtedness could have important consequences to us, including:
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• impairing our ability to obtain additional financing in the future; and
• increasing our cost of borrowing.
Any one of these limitations could have a material effect on our business, financial condition, cash flows, results of operations and ability to satisfy our obligations in respect of our outstanding debt.
Despite our current debt levels, we may incur substantially more indebtedness, which could further exacerbate the risks associated with our substantial leverage.
We and our subsidiaries may be able to incur additional indebtedness in the future, which may be secured. While our Amended and Restated Senior Secured Credit Facilities limit our ability and the ability of our subsidiaries to incur additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and thus, notwithstanding these restrictions, we may still be able to incur substantially more debt. In addition, provided that no default or event of default (as defined in the Amended and Restated Senior Secured Credit Facilities) has occurred and is continuing, we have the option to add one or more incremental term loan or revolving credit facilities or increase commitments under the Amended and Restated Revolving Credit Facility by an aggregate amount of the sum of (X) (i) if the incremental loans are first lien loans, an amount such that the first lien net leverage ratio does not exceed 4.00:1.00, (ii) if the incremental loans are junior lien loans, an amount such that the secured net leverage ratio does not exceed 4.00:1.00, (iii) if the incremental loans are unsecured, either the total net leverage ratio does not exceed 5.00:1.00 or the fixed charge coverage ratio is not less than 2.00:1.00, or, in each case, if the incremental loans are incurred with a permitted acquisition, an amount such that the applicable leverage ratio will not increase as a result of the permitted acquisition (on a pro forma basis giving effect to the incremental loans); plus (Y) an amount equal to certain prior voluntary prepayments, loan buybacks and commitment reductions of loans under the Amended and Restated Senior Secured Credit Facilities, plus (Z) an amount equal to the greater of $160 million and 100% of Consolidated EBITDA (as defined in the Amended and Restated Senior Secured Credit Facilities). As of December 31, 2020, we had $525.2 million of borrowings outstanding under the Amended and Restated Term Loan Facility, with $149.0 million in additional borrowing capacity under the Amended and Restated Revolving Credit Facility (after giving effect to $1.0 million of outstanding letters of credit). To the extent that we incur additional indebtedness, the risks that we now face related to our substantial indebtedness could increase.
The covenants in our Amended and Restated Senior Secured Credit Facilities impose restrictions that may limit our operating and financial flexibility.
Our Amended and Restated Senior Secured Credit Facilities contain a number of significant restrictions and covenants that limit our ability, among other things, to:
• incur additional indebtedness;
• prepay, redeem or repurchase specified indebtedness;
• create certain liens;
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• sell, transfer or otherwise convey certain assets;
• make certain investments;
• create dividend or other payment restrictions affecting subsidiaries;
• engage in transactions with affiliates;
• create unrestricted subsidiaries;
• enter into new lines of business.
In addition, the Amended and Restated Revolving Credit Facility contains a financial covenant requiring us to comply with a 5.50 to 1.00 total first lien net secured leverage ratio test. This financial covenant is tested quarterly if the aggregate amount of revolving loans, swingline loans and letters of credit outstanding under the Amended and Restated Revolving Credit Facility (net of up to $10.0 million of outstanding letters of credit) exceeds 35% of the total commitments thereunder.
These covenants could materially and adversely affect our ability to finance our future operations or capital needs. Furthermore, they may restrict our ability to expand and pursue our business strategies and otherwise conduct our business. Our ability to comply with these covenants may be affected by circumstances and events beyond our control, such as prevailing economic conditions and changes in regulations, and we cannot assure you that we will be able to comply with such covenants. These restrictions also limit our ability to obtain future financings to withstand a future downturn in our business or the economy in general. In addition, complying with these covenants may also cause us to take actions that may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.
A breach of any covenant in our Amended and Restated Senior Secured Credit Facilities or the agreements and indentures governing any other indebtedness that we may have outstanding from time to time would result in a default under that agreement or indenture after any applicable grace periods. A default, if not waived, could result in acceleration of the debt outstanding under the agreement and in a default with respect to, and an acceleration of, the debt outstanding under other debt agreements. If that occurs, we may not be able to make all of the required payments or borrow sufficient funds to refinance such debt. Even if new financing were available at that time, it may not be on terms that are acceptable to us or terms as favorable as our current agreements. If our debt is in default for any reason, our business, results of operations and financial condition could be materially and adversely affected.
Risks Relating to Ownership of Our Common Stock
The price of our common stock has fluctuated substantially over the past several months and may continue to fluctuate substantially in the future.
Our stock price has been, and may continue to be, subject to significant fluctuations, and has decreased significantly in recent months from historical trading levels as a result of a variety of factors, some of which are beyond our control. We may fail to meet the expectations of our stockholders or securities analysts at some point in the future, and our stock price could decline further as a result. This volatility may prevent you from being able to sell your common stock at or above the price you paid for your common stock. Additionally, further declines in our stock price could require further goodwill writedowns.
In addition, the stock markets in general have experienced extreme volatility recently that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources and harm our business, operating results and financial condition.
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Because Onex controls the majority of our equity securities, it may control all major corporate decisions and its interests may conflict with the interests of other holders of our equity securities.
As of December 31, 2020, Onex owned 47,058,332 shares of our common stock, representing 65.8% of our outstanding common stock. In addition, as of December 31, 2020, Onex owned 69,718,919 shares of our Series A Preferred Stock, representing 161,891,916 shares of our common stock on an as-converted basis, after accounting for the accumulated accreting return at a rate per annum equal to 7% on the accreted liquidation preference and paid in-kind. Onex’s beneficial ownership of our common stock, on an as-converted basis, is approximately 85.6%.
The holders of our Series A Preferred Stock have the right to approve certain matters, including (i) amendments to our organizational documents in a manner adverse to the Series A Preferred Stock, (ii) the creation or issuance of senior or parity equity securities or (iii) the issuance of any convertible indebtedness, other class of preferred stock or other equity securities in each case with rights to payments or distributions in which the Series A Preferred Stock would not participate on a pro-rata, as-converted basis. In addition, for so long as the Series A Preferred Stock represents more than 30% of the outstanding common stock on an as-converted basis, without the approval of a majority of the directors elected by the holders of the Series A Preferred Stock, we may not (i) incur new indebtedness to the extent certain financial metrics are not satisfied, (ii) redeem or repurchase any equity securities junior to the Series A Preferred Stock, (iii) enter into any agreement for the acquisition or disposition of assets or businesses involving a purchase price in excess of $100 million, (iv) hire or terminate the chief executive officer of the Company or (v) make a voluntary filing for bankruptcy or commence a dissolution of the Company. Holders of our Series A Preferred Stock also have the right, for so long as the outstanding Series A Preferred Stock represents specified percentages of our outstanding common stock on an as-converted basis, to elect up to five members of our Board of Directors.
Accordingly, for so long as Onex continues to hold the majority of our equity securities, Onex will exercise a controlling influence over our business and affairs and will have the power to determine all matters submitted to a vote of our stockholders, including the election of directors and approval of significant corporate transactions such as amendments to our certificate of incorporation, mergers and the sale of all or substantially all of our assets. Onex could cause corporate actions to be taken that conflict with the interests of our other stockholders. This concentration of ownership could have the effect of deterring or preventing a change in control transaction that might otherwise be beneficial to our stockholders. In addition, Onex may in the future own businesses that directly compete with ours.
Future issuances of common stock may cause dilution to our existing shareholders and adversely affect the market price of our common stock.
The market price of our common stock could decline as a result of sales of a large number of our common stock in the market, or the sale of securities convertible into a large number of our common stock. The perception that these sales could occur may also depress the market price of our common stock. As of December 31, 2020 we had outstanding 71,445,992 shares of Series A Preferred Stock with an aggregate liquidation preference of approximately $14.1 million, after accounting for the accumulated accreting return at a rate per annum equal to 7% on the accreted liquidation preference and paid in-kind. The aggregate accreting return will increase the number of shares of common stock issuable upon the conversion of the Series A Preferred Stock, which may result in a further decrease in the market value of our common stock. In addition, the terms of the Series A Preferred Stock provide that the conversion price may be reduced, which would result in the shares of Series A Preferred Stock being convertible into additional common stock upon certain events, including distributions on our common stock or issuances of additional common stock or equity-linked securities, at a price less than the then-applicable conversion price. The issuance of common stock upon conversion of the Series A Preferred Stock would result in immediate dilution to existing holders of our common stock, which dilution could be substantial. In addition, the market price of our common stock may be adversely affected by such factors as whether the market price is near or above the conversion price, which could make conversion of the shares of Series A Preferred Stock more likely.
Further, the Series A Preferred Stock ranks senior to our common stock, which could affect the value of the common stock on liquidation or on a change in control transaction. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock, and may result in dilution to owners of our common stock. Because our decision to issue additional
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debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future issuances. Also, we cannot predict the effect, if any, of future issuances of our common stock on the market price of our common stock.
Our directors who have relationships with Onex may have conflicts of interest with respect to matters involving us.
Two of our ten directors are affiliated with Onex. These persons have fiduciary duties to both us and Onex. As a result, they may have real or apparent conflicts of interest on matters affecting both us and Onex, which in some circumstances may have interests adverse to ours. Onex is in the business of making or advising on investments in companies and may hold, and may from time to time in the future acquire, interests in, or provide advice to, businesses that directly or indirectly compete with certain portions of our business or that are suppliers or customers of ours. In addition, as a result of Onex’ ownership interest, conflicts of interest could arise with respect to transactions involving business dealings between us and Onex including potential acquisitions of businesses or properties, the issuance of additional securities, the payment of dividends by us and other matters. In January 2018, Onex completed its acquisition of SMG Holdings Inc. (“SMG”), a leading global manager of convention centers, stadiums, arenas, theaters, performing arts centers and other venues. SMG subsequently merged with AEG Facilities, LLC to form ASM Global (“ASM”). Certain of our events are staged in ASM managed venues and two of our directors affiliated with Onex are also directors of ASM.
In addition, our amended and restated certificate of incorporation provides that the doctrine of “corporate opportunity” does not apply with respect to us, to Onex or certain related parties or any of our directors who are employees of Onex or its affiliates such that Onex and its affiliates are permitted to invest in competing businesses or do business with our customers. Under the amended and restated certificate of incorporation, subject to the limitations set forth therein, Onex is not required to tell us about a corporate opportunity, may pursue that opportunity for itself or it may direct that opportunity to another person without liability to our stockholders. To the extent they invest in such other businesses, Onex may have differing interests than our other stockholders.
We are a “controlled company” within the meaning of the rules of the New York Stock Exchange and, as a result, rely on exemptions from certain corporate governance requirements.
Onex owns the majority of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards. A company of which more than 50% of the combined voting power is held by an individual, a group or another company is a “controlled company” within the meaning of the rules of the New York Stock Exchange and may elect not to comply with certain corporate governance requirements of the New York Stock Exchange, including:
• the requirement that a majority of our board consist of independent directors;
We currently rely on certain of the exemptions listed above. Accordingly, while we currently have a majority of independent directors, our nominating and corporate governance and compensation committees do not consist entirely of independent directors. The independence standards are intended to ensure that directors who meet those standards are free of any conflicting interest that could influence their actions as directors. Accordingly, our shareholders will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange. In addition, Rule 10C-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as adopted by the national securities exchanges, requires, among other things, that:
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As a “controlled company”, we are not subject to these compensation committee independence requirements, and accordingly, our shareholders will not have the same protections afforded to stockholders of companies that are subject to these compensation committee independence requirements.
Taking advantage of the reduced disclosure requirements applicable to “emerging growth companies” may make our common stock less attractive to investors.
The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) provides that, so long as a company qualifies as an “emerging growth company,” it will, among other things:
We intend to continue to take advantage of each of the exemptions described above. We have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 107(b) of the JOBS Act. We could be an emerging growth company for up to five years following our 2017 IPO. We cannot predict if investors will find our common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions will result in less active trading or more volatility in the price of our common stock.
Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes- Oxley Act could have a material adverse effect on our business and stock price.
We are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. As an emerging growth company, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the earlier of the fiscal year ended December 31, 2022 or the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.
In connection with becoming a public company, we have undertaken various actions, and will need to take additional actions, such as implementing numerous internal controls and procedures and hiring additional accounting or internal audit staff or consultants. We have hired a third-party service provider to assist us with implementation of our internal audit function. Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. Additionally, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. If we
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identify any material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting once we are no longer an emerging growth company, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the New York Stock Exchange, the SEC or other regulatory authorities, which could require additional financial and management resources. In addition, if we fail to remedy any material weakness, our financial statements could be inaccurate and we could face restricted access to capital markets.
Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation, as amended, and our second amended and restated bylaws, as well as provisions of the Delaware General Corporation Law (the “DGCL”), could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, including in transactions in which stockholders might otherwise receive a premium for their shares. Among other things, our amended and restated certificate of incorporation and amended and restated bylaws:
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take corporate actions other than those you desire.
General Risk Factors
At any given point in time, general economic conditions may have an adverse impact on the industry sectors in which our trade shows, conferences and other events operate, and therefore may negatively affect demand for exhibition space and attendance at our trade shows, conferences and other events.
Our results are influenced by domestic as well as global general economic conditions because we draw exhibitors and attendees from around the world, such as the severe impact in 2020 from the COVID-19 pandemic.
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However, we are affected to a larger degree by conditions within the individual industry sectors in which our trade shows, conferences and other events operate. The longer a recession or economic downturn continues, the more likely it becomes that our customers may reduce their marketing and advertising or procurement budgets. Any material decrease in marketing or procurement budgets could reduce the demand for exhibition space or reduce attendance at our trade shows, conferences and other events which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Changes in our income tax rates or other indirect taxes may affect our future financial results.
Our future effective income tax rates may be favorably or unfavorably affected by unanticipated changes in the valuation of our deferred tax assets and liabilities, by changes in our stock price, or by changes in tax laws or their interpretation, including the Tax Cuts and Jobs Act enacted in December 2017. The Tax Cuts and Jobs Act introduced significant changes to U.S. income tax law. Accounting for the income tax effects of the Tax Cuts and Jobs Act has required significant judgments and estimates as well as accumulation of information not previously provided for in U.S. tax law. As additional regulatory or accounting guidance related to the Tax Cuts and Jobs Act is issued, our analysis may change, which could materially affect our tax obligations and effective tax rate. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. These continuous examinations may result in unforeseen tax-related liabilities, which may harm our future financial results.
Our information technology systems, including our ERP business management system, could be disrupted.
The efficient operation of our business depends on our information technology systems. We rely on our information technology systems and certain third-party providers to effectively manage our business data, communications, vendor relationships, order entry and fulfillment and other business and financial processes. We also rely on internet service providers, mobile networks and other third-party systems to operate our business. We are currently in the process of reviewing and updating our information technology systems and processes in order to enhance our data analytics capability. This implementation process will consume time and resources and may not result in our desired outcome or improved financial performance. Our failure to properly and efficiently implement our information technology systems, or the failure of our information technology systems to perform as we anticipate, could disrupt our business and could result in transaction errors, processing inefficiencies and the loss of revenue and customers, causing our business and results of operations to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures and viruses. While we maintain disaster recovery plans, any such damage or interruption could have a material adverse effect on our business.
We could fail to protect certain employee or customer data.
We, and third-party providers on our behalf, collect and retain certain employee and customer data, including personally identifiable information, and, in some cases, credit card data. Our various information technology systems enter, process, summarize and report such data. The integrity and protection of such data is critical to our business, and our customers and employees have an expectation that we will adequately protect their personal information. Public attention regarding the use of personal information and data transfer has increased in recent years, and the regulatory environment governing information, security and privacy laws, as well as the requirements imposed on us by the credit card industry, are increasingly demanding and continue to evolve rapidly. The changing nature of privacy laws in the U.S., the European Union and elsewhere, including the European Union’s General Data Privacy Regulation (“GDPR”), which became effective in May 2018, and the California Consumer Privacy Act, which became effective in January 2020, could impact our processing of personal and sensitive information of our employees, vendors and customers. The GDPR introduced new fines and penalties for a breach of requirements, which may result in significant fines of up to 4% of annual global revenues, or €20.0 million, whichever is greater. Maintaining compliance with applicable information security and privacy regulations could increase our operating costs and require significant management time and attention. Failure to comply with such regulations may subject us to negative publicity, government scrutiny or remedies that may harm our business, including fines or demands that we modify or cease existing business practices. We rely on third-party vendors to, among other things, host our websites, customer databases and billing system. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services or our own systems could negatively impact
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our relationships with customers, adversely affect our brands and business and expose us to third-party liabilities. We exercise limited control over these third-party vendors, which increases our vulnerability to problems with services they provide. Furthermore, a compromised data system or the intentional, inadvertent or negligent release or disclosure of data by us or our third-party providers could result in theft, loss, or fraudulent or unlawful use of customer, employee or company data, any of which could harm our reputation and/or result in costs, fines or lawsuits, which could materially adversely affect our financial condition and operating results.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We have five key offices located in New York, New York; San Juan Capistrano, California; Alpharetta, Georgia; Denver, Colorado; and Culver City, California. We also have several other smaller locations throughout the United States, including in White Plains, New York; Hasbrouck Heights, New Jersey; Rye, New Hampshire; Framingham, Massachusetts; Blue Ash, Ohio; Louisville, Kentucky; and State College, Pennsylvania. We lease our offices from third parties on market terms and, in some cases following an acquisition, through transition services agreements with the applicable seller.
Item 3. Legal Proceedings.
From time to time, we may be involved in general legal disputes arising in the ordinary course of our business. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, financial condition or results of operations. Refer to Note 16, Commitments and Contingencies, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding our legal proceedings.
Item 4. Mine Safety Disclosures.
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information for Common Stock and Holders of Record
Our common stock has been listed on the New York Stock Exchange since April 28, 2017 and trades under the symbol "EEX". The approximate number of record holders of our common stock on February 18, 2021 was 40. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Issuer Purchases of Equity Securities
In October 2020, we announced that our Board of Directors had authorized a $20 million share repurchase program. Share repurchases may be made from time to time through and including December 31, 2021, subject to early termination or extension by our Board of Directors. The share repurchase program may be suspended or discontinued at any time without notice. There is no minimum number of shares that we are required to repurchase. Shares may be purchased from time to time in the open market or in privately negotiated transactions. Such purchases will be at times and in amounts as we deem appropriate, based on factors such as market conditions, legal requirements and other business considerations.
In July 2019, we announced that our Board of Directors had authorized a $30 million share repurchase program. Share repurchases may be made from time to time through and including July 31, 2020, subject to early termination or extension by the Board of Directors, through open-market purchases, either with or without a 10b5-1 plan, block transactions, privately negotiated purchases or otherwise. The repurchase program may be suspended or discontinued at any time without notice. There is no minimum number of shares that we are required to repurchase and the timing and amount of any shares repurchased under the program will depend on a variety of factors, including available liquidity, general market and economic conditions, regulatory requirements, capital structure optimization, valuation metrics and other factors. This share repurchase program was discontinued in the first quarter of 2020.
In November 2018, we announced that our Board of Directors had authorized a $20 million share repurchase program. Share repurchases under this program were authorized through December 31, 2019. There were no remaining amounts available to repurchase shares related to the share repurchase plan announced in November 2018 at December 31, 2019.
The following table presents our purchases of common stock during the fourth quarter ended December 31, 2020, as part of the publicly announced share repurchase program:
Stock Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the
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Securities Act of 1933, or the Securities Exchange Act of 1934, each as amended, except to the extent that it is specifically incorporated by reference into such filing.
The following graph compares the yearly percentage change in the cumulative total stockholder return on our common stock with corresponding changes in the cumulative total returns of the Russell 2000 Index and our peer groups for the period from April 28, 2017, the first day our stock began trading on the New York Stock Exchange, through December 31, 2020. The comparison assumes an initial investment of $100 at the close of business on April 28, 2017 in our stock and in each of the indices and also assumes the reinvestment of dividends where applicable. This historical performance is not necessarily indicative of future performance.
Item 6. Selected Financial Data.
The following table presents selected consolidated financial data for the periods and at the dates indicated. The selected consolidated financial data as of December 31, 2020, 2019, 2018, 2017 and 2016, and for the years ended December 31, 2020, 2019, 2018, 2017 and 2016, have been derived from our audited consolidated financial statements.
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This financial data should be read in conjunction with the consolidated financial statements, related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information appearing elsewhere in this Annual Report on Form 10-K.
The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business” and our consolidated financial statements and related accompanying notes included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
(dollars in millions, share data in thousands except earnings per share)
Statement of (loss) income and comprehensive (loss) income data:
Loss on extinguishment of debt(5) — — — 3.0 12.8
(Benefit from) provision for income taxes (57.6 ) (5.0 ) (8.3 ) (35.0 ) 14.0
Net (loss) income per share attributable to common stockholders
Weighted average common shares outstanding
Statement of cash flows data:
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As of December 31,
(dollars in millions)
Balance sheet data:
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Quarterly Results of Operations (Unaudited)
The following table sets forth our unaudited quarterly consolidated statements of (loss) income and comprehensive (loss) income data for each of the eight quarterly periods ended December 31, 2020 and 2019. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this Annual Report on Form 10-K and, in our opinion, includes all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. These quarterly results are not necessarily indicative of our operating results for a full year or any future period.
Quarter Ended
(unaudited)
(dollars in millions, share data in thousands except earnings per share)
Statement of (loss) income and comprehensive (loss) income data:
Intangible asset impairments 17.4 — — 59.4 — 17.0 — —
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of the financial condition and results of our operations should be read in conjunction with “Item 6. Selected Financial and Operating Data” and our consolidated financial statements and related notes of Emerald Holding, Inc. included in Item 15 of this Annual Report on Form 10-K. You should review “Item 1A. Risk Factors” section of this filing for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by any forward-looking statements contained in the following discussion and analysis.
Overview and Background
Emerald is a leading operator of business-to-business trade shows in the United States. Leveraging our shows as key market-driven platforms, we combine our events with effective industry insights, digital tools, and data-focused solutions to create uniquely rich experiences. Emerald strives to build its customers’ businesses by creating opportunities that deliver tangible results.
All of our trade show franchises typically hold market-leading positions within their respective industry verticals, with significant brand value established over a long period of time. Each of our shows is held at least annually, with certain franchises offering multiple editions per year. As our shows are frequently the largest and most well attended in their respective industry verticals, we are able to attract high-quality attendees, including those who have the authority to make purchasing decisions on the spot or subsequent to the show. The participation of these attendees makes our trade shows “must-attend” events for our exhibitors, further reinforcing the leading positions of our trade shows within their respective industry verticals. Our attendees use our shows to fulfill procurement needs, source new suppliers, reconnect with existing suppliers, identify trends, learn about new products and network with industry peers, which we believe are factors that make our shows difficult to replace with non-face-to-face events. Our portfolio of trade shows is well-balanced and diversified across both industry sectors and customers.
In addition to organizing our trade shows, conferences and other events, we also operate content and content-marketing websites and related digital products, and produce publications, each of which is aligned with a specific sector for which we organize an event. We also offer B2B commerce and digital merchandising solutions, serving the needs of manufacturers and retailers, through our recently acquired Elastic Suite and Flex platforms. In addition to their respective revenues, these products complement our live events and provide us year-round channels of customer acquisition and development.
Organic Growth Drivers
We are primarily focused on generating organic growth by understanding and leveraging the drivers for increased exhibitor and attendee participation at trade shows and providing year-round services that provide incremental value to those customers. Creating new opportunities for exhibitors to influence their market, engage with significant buyers, generate incremental sales and expand their brand’s awareness in their industry builds further demand for exhibit space and strengthens the value proposition of a trade show, generally allowing us to modestly increase booth space pricing annually across our portfolio. At the same time, our trade shows provide attendees with the opportunity to enhance their industry connectivity, develop relationships with targeted suppliers and distributors, discover new products, learn about new industry developments, celebrate their industry’s achievements and, in certain cases, obtain continuing professional education credits, which we believe increases their propensity to return and, consequently, drives high recurring participation among our exhibitors. By investing in and promoting these tangible and return-on-investment linked outcomes, we believe we will be able to continue to enhance the value proposition for our exhibitors and attendees alike, thereby driving strong demand and premium pricing for exhibit space, sponsorship opportunities and attendee registration.
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Acquisitions
We are also focused on growing our national footprint through the acquisition of high-quality events that are leaders in their specific industry verticals. Since the Onex Acquisition in June 2013, we have completed 20 strategic acquisitions, with purchase prices, excluding the $335.0 million acquisition of GLM, ranging from approximately $5.0 million to approximately $46.0 million, and annual revenues ranging from approximately $1.3 million to approximately $15.1 million. Historically, we have completed acquisitions at EBITDA purchase multiples that are typically in the mid-to-high single digits. Our acquisitions have historically been structured as asset deals that have resulted in the generation of long-lived tax assets, which in turn have reduced our purchase multiples when incorporating the value of the created tax assets. In the future, we intend to look for acquisitions with similarly attractive valuation multiples. The 20 acquisitions we have completed are described as follows:
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Trends and Other Factors Affecting Our Business
There are a number of existing and developing factors and trends which impact the performance of our business, and the comparability of our results from year to year and from quarter to quarter, including:
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are revenues, cost of revenues, selling, general and administrative expenses, interest expense, depreciation and amortization, income taxes, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow.
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Basis of Presentation
As described in Note 18, Segment Information, in the notes to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we made certain changes in 2019 that changed the determination of our reportable segments. These changes were made to be consistent with the information provided our Chief Executive Officer, who is considered the chief operating decision-maker ("CODM"). The CODM evaluates performance based on the results of six executive brand portfolios, which represent our six operating segments. Based on an evaluation of economic similarities and the nature of services and types of customers, four of these operating segments have been aggregated into two reportable segments, the Commerce reportable segment and the Design and Technology reportable segment. The remaining two operating segments do not meet the quantitative thresholds to be considered reportable operating segments and are included in the “All Other” category. In addition, we have a Corporate-Level Activities category consisting of finance, legal, information technology and administrative functions.
The following discussion provides additional detailed disclosure for the two reportable segments, the All Other category and the Corporate-Level Activity category:
Commerce: This segment includes events and services covering merchandising, licensing, retail sourcing and marketing to enable professionals to make informed decisions and meet consumer demands.
Design and Technology: This segment includes events and services that support a wide variety of industries connecting businesses and professionals with products, operational strategies, and integration opportunities to drive new business and streamline processes and creative solutions.
All Other: This category consists of Emerald’s remaining operating segments, which provide diverse events and services but are not aggregated with the reportable segments. Each of the operating segments in the All Other category represents less than 10% of consolidated revenue and does not meet the criteria to be a separate reportable segment.
Corporate-Level Activity: This category consists of Emerald’s finance, legal, information technology and administrative functions.
Revenues
We generate revenues primarily from selling trade show exhibit space to exhibitors on a per square foot basis. Other trade show revenue streams include sponsorship, fees for ancillary exhibition services and attendee registration fees. Additionally, we generate revenue through conferences, digital media and print publications that complement our trade shows. We also engage third-party sales agents to support our marketing efforts. More than 95% of our sales are made by our employees, with less than 5% made by third-party sales agents.
We define “organic revenue growth” and “organic revenue decline” as the growth or decline, respectively, in our revenue from one period to the next, adjusted for the revenue impact of: (i) acquisitions and dispositions, (ii) discontinued events, (iii) material show scheduling adjustments and (iv) event cancellations for which the Company has received, or expects to receive, claim proceeds from its event cancellation insurance policy. We disclose changes in Organic revenue because we believe it assists investors and analysts in comparing Emerald’s operating performance across reporting periods on a consistent basis by excluding items that we do not believe reflect a true comparison of the trends of the existing event calendar given changes in timing or strategy. Management and Emerald’s board of directors evaluate changes in Organic revenues to understand underlying revenue trends of its events. Organic revenue is not defined under GAAP, and has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations include that Organic revenue reflects certain adjustments that we consider not to be indicative of our ongoing operating performance. Because not all companies use identical calculations, our presentation of Organic revenue may not be comparable to other similarly titled measures used by other companies.
Organic Revenue
Organic revenue is a supplemental non-GAAP financial measure of performance and is not based on any standardized methodology prescribed by GAAP. Organic revenue should not be considered in isolation or as an alternative to revenues or other measures determined in accordance with GAAP. Also, Organic revenues is not necessarily comparable to similarly titled measures used by other companies.
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The most directly comparable GAAP measure to Organic revenue is revenues. For a reconciliation of Organic revenues to revenues as reported, see footnote 6 to the table under the heading “Results of Operations - Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019”.
Other Income
We maintain event cancellation insurance to protect against losses due the unavoidable cancellation, postponement, relocation and enforced reduced attendance at events due to certain covered causes. Specifically, these causes include event cancellation caused by the outbreak of communicable diseases, including COVID-19, as well as losses caused by natural disasters such as hurricanes. Our Other Income is primarily comprised of received or confirmed event cancellation insurance claim proceeds.
Cost of Revenues
Selling, General and Administrative Expenses
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Interest Expense
Interest expense represents interest payments and refinancing fees paid to our lenders. On May 22, 2017, we refinanced our senior secured credit facilities with the Amended and Restated Senior Secured Credit Facilities (the “2017 Refinancing”). We further amended the Amended and Restated Senior Secured Credit Facilities in November 2017 to reduce the applicable interest rates.Interest expense for the years ended December 31, 2020, 2019 and 2018 principally represented interest paid in respect of our Amended and Restated Senior Secured Credit Facilities.
Depreciation and Amortization
We have historically grown our business through acquisitions and, in doing so, have acquired significant intangible assets, the value of some of which is amortized over time. These acquired intangible assets, unless determined to be indefinite-lived, are amortized over extended periods of ten to thirty years from the date of each acquisition for reporting under accounting principles generally accepted in the United States of America (“GAAP”) purposes, or fifteen years for tax purposes. This amortization expense reduces our taxable income. During 2018, we changed certain of our trade name intangibles assets from indefinite-lived to definite-lived assets, with estimated useful lives of between 10 and 30 years. As a result of the change in estimated useful lives of certain of our trade name intangible assets, we recorded $5.2 million, $5.9 million and $1.0 million in additional amortization expense for the years ended December 31, 2020, 2019 and 2018, respectively. Depreciation expense relates to property and equipment and represented approximately 1% of our total revenues for the year ended December 31, 2020 and less than 1% of our total revenues for each of the years ended December 31, 2019 and 2018.
Income Taxes
Income tax expense consists of U.S. federal, state and local taxes based on income in the jurisdictions in which we operate.
We used substantially all of our federal NOL carryforwards during 2017, and therefore our income tax payment obligations increased during 2018, notwithstanding the overall reduction in federal corporate tax rates as a result of the Tax Cuts and Jobs Act (“Tax Act”), and 2019. We also record deferred tax charges or benefits primarily associated with our utilization or generation of net operating loss carryforwards and book-to-tax differences related to amortization of goodwill, amortization of intangibles assets, depreciation, stock-based compensation charges and deferred financing costs.
The Tax Act significantly revised the U.S. corporate income tax law by, among other things, decreasing the federal corporate income tax rate from 35% to 21% effective January 1, 2018.
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Cash Flow Model
We have favorable cash flow characteristics, as described below (see “—Liquidity and Capital Resources—Cash Flows”), as a result of our high profit margins, low capital expenditures and consistently negative working capital. Our working capital is negative as our current assets are generally lower than our current liabilities. Current assets primarily include accounts receivable and prepaid expenses, while current liabilities primarily include accounts payable, borrowings under our Amended and Restated Revolving Credit Facility (“Revolving Credit Facility”) and deferred revenues. Cash received prior to an event is recorded as deferred revenue on our balance sheet and recognized as revenue upon completion of each trade show. The implication of having negative working capital is that changes in working capital represent a source of cash as our business grows. As a result of COVID-19, the accounts receivable and deferred revenue balances related to cancelled events have been reclassified to Cancelled event liabilities in the condensed consolidated balance sheets, as the net amount represents balances which we expect will be refunded to our customers. While we believe that our business interruption insurance proceeds will largely mitigate this liability, cash outflows for customer refunds will likely exceed insurance claim settlement cash inflows for the foreseeable future.
The primary driver for our negative working capital is the sales cycle for a trade show, which typically begins during the twelve months prior to a show. In the interim period between the current show and the following show, we continue to sell to new and past exhibitors and collect payments on contracted exhibit space. Most of our exhibitors pay in full in advance of each trade show, whereas the bulk of expenses are paid close to or after the show. Cash deposits start to be received as early as twelve months prior to a show taking place and the balance of booth space fees are typically received in cash one month prior to a show taking place. This highly efficient cash flow model, where cash is received in advance of expenses to be paid, creates a working capital benefit.
Free Cash Flow
In addition to net cash provided by operating activities presented in accordance with GAAP, we present Free Cash Flow because we believe it is a useful indicator of liquidity that provides information to management and investors about the amount of cash generated from our core operations that, after capital expenditures, can be used for the repayment of indebtedness, paying of dividends, repurchasing of shares of our common stock and strategic initiatives, including investing in our business and making strategic acquisitions.
Free Cash Flow is a supplemental non-GAAP financial measure of liquidity and is not based on any standardized methodology prescribed by GAAP. Free Cash Flow should not be considered in isolation or as an alternative to net cash provided by operating activities or other measures determined in accordance with GAAP. Also, Free Cash Flow is not necessarily comparable to similarly titled measures used by other companies.
The most directly comparable GAAP measure to Free Cash Flow is net cash provided by operating activities. For a reconciliation of Free Cash Flow to net cash provided by operating activities, see footnote 6 to the table under the heading “Results of Operations - Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019”.
Adjusted EBITDA
Adjusted EBITDA is a key measure of our performance. We define Adjusted EBITDA as net loss before (i) interest expense, (ii) income tax benefit, (iii) depreciation and amortization, (iv) stock-based compensation, (v) deferred revenue adjustment, (vi) goodwill and other intangible asset impairment charge, (vii) material show scheduling adjustments, and (viii) other items that management believes are not part of our core operations. We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.
Management and our board of directors use Adjusted EBITDA to assess our financial performance and believe it is helpful in highlighting trends because it excludes the results of decisions that are outside the control of management, while other performance metrics can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. We reference Adjusted EBITDA frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical operating performance of prior periods.
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Adjusted EBITDA is not defined under GAAP, and has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations include that Adjusted EBITDA excludes certain normal recurring expenses and one-time cash adjustments that we consider not to be indicative of our ongoing operating performance. Because not all companies use identical calculations, our presentation of Adjusted EBITDA may not be comparable to other similarly titled measures used by other companies.
The most directly comparable GAAP measure to Adjusted EBITDA is net loss. For a reconciliation of Adjusted EBITDA to net loss, see footnote 4 to the table under the heading “Results of Operations - Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019”.
Adjusted Net Income
Our presentation of Adjusted Net Income adjusts net loss for (i) stock-based compensation, (ii) deferred revenue, (iii) goodwill and other intangible asset impairment charges, (iv) other items that management believes are not part of our core operations, (v) amortization of deferred financing fees and discount, (vi) amortization of acquired intangible assets and (vii) tax adjustments related to non-GAAP adjustments.
We use Adjusted Net Income as a supplemental metric to evaluate our business’s performance in a way that also considers our ability to generate profit without the impact of certain items. For example, it is useful to exclude stock-based compensation expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business, and these expenses can vary significantly across periods due to timing of new stock-based awards. We also exclude professional fees associated with debt refinancing, the amortization of intangible assets and certain discrete costs, including deferred revenue adjustments, impairments and transaction costs (including professional fees and other expenses associated with acquisition activity) in order to facilitate a period-over-period comparison of the Company’s financial performance. Each of the normal recurring adjustments and other adjustments described in this paragraph help management with a measure of our operating performance over time by removing items that are not related to day-to-day operations.
Adjusted Net Income is not defined under GAAP and has limitations as an analytical tool, and you should not consider such measure either in isolation or as an alternative to net (loss) income, cash flows from operating activities or other measures determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of Adjusted Net Income may not be comparable to other similarly titled measures used by other companies. The most directly comparable GAAP measure to Adjusted Net Income is net loss. The most directly comparable GAAP measure to Adjusted Net Income is net loss. For a reconciliation of Adjusted Net Income to net loss, see footnote 5 to the table under the heading “Results of Operations—Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019”.
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Results of Operations
Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019
The tables in this section summarize key components of our results of operations for the periods indicated.
Year Ended December 31,
(dollars in millions)
Statement of loss and comprehensive loss data:
Selling, general and administrative expenses(1) 118.6 133.4 (14.8 ) (11.1 )%
Depreciation and amortization expense 48.6 52.0 (3.4 ) (6.5 )%
Benefit from income taxes (57.6 ) (5.0 ) (52.6 ) NM
Net loss and comprehensive loss $ (633.6 ) $ (50.0 ) $ (583.6 ) NM
Other financial data (unaudited):
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We define Adjusted EBITDA as net loss before (i) interest expense (including unrealized loss on interest rate swap and floor, net, for periods prior to the expiration of our interest rate swap), (ii) loss on extinguishment of debt, (iii) income tax expense, (iv) goodwill impairments, (v) intangible asset impairments, (vi) depreciation and amortization, (vii) stock-based compensation, (viii) deferred revenue adjustment and (ix) other items that management believes are not part of our core operations. We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management and our board of directors use Adjusted EBITDA to assess our financial performance and believe they are helpful in highlighting trends because it excludes the results of decisions that are outside the control of management, while other performance metrics can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. We reference Adjusted EBITDA frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical operating performance of prior periods. Adjusted EBITDA is not defined under GAAP and has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations include that Adjusted EBITDA excludes certain normal recurring expenses and one-time cash adjustments that we consider not to be indicative of our ongoing operative performance. Because not all companies use identical calculations, our presentation of Adjusted EBITDA may not be comparable to other similarly titled measures used by other companies.
Year Ended December 31,
(unaudited)
(dollars in millions)
Add (Deduct):
Benefit from income taxes (57.6 ) (5.0 )
Intangible asset impairments(b) 76.8 17.0
Depreciation and amortization 48.6 52.0
Stock-based compensation expense(c) 6.7 7.7
Deferred revenue adjustment(d) - 0.3
Other items(e) 7.0 6.4
(a) Represents the non-cash goodwill impairments described in footnote 2 above.
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We use Adjusted Net Income as a supplemental metric to evaluate our business’s performance in a way that also considers our ability to generate profit without the impact of certain items.
For example, we exclude the amortization of intangible assets and certain discrete costs, including deferred revenue adjustments, impairments and transaction costs (including professional fees and other expenses associated with acquisition activity) in order to facilitate a period-over-period comparison of our financial performance. This measure also reflects an adjustment for the difference between cash amounts paid in respect of taxes and the amount of tax recorded in accordance with GAAP. Each of the normal recurring adjustments and other adjustments described in this paragraph help to provide management with a measure of our operating performance over time by removing items that are not related to day-to-day operations or are noncash expenses.
Adjusted Net Income is not defined under GAAP and has limitations as an analytical tool, and you should not consider such measure either in isolation or as an alternative to net loss, cash flows from operating activities or other measures determined in accordance with GAAP. The most directly comparable GAAP measure to Adjusted Net Income is net loss. Because not all companies use identical calculations, our presentation of Adjusted Net Income may not be comparable to other similarly titled measures used by other companies.
Year ended December 31
(unaudited)
(dollars in millions)
Add (Deduct):
Stock-based compensation expense(a) 6.7 7.7
Deferred revenue adjustment(b) — 0.3
Intangible asset impairments(d) 76.8 17.0
Other items(e) 7.0 6.4
Amortization of deferred financing fees and discount 1.5 1.4
Amortization of acquired intangible assets(f) 46.0 49.6
Tax adjustments related to non-GAAP adjustments(g) (67.4 ) (34.2 )
Adjusted Net Income $ 40.4 $ 67.3
(c) Represents the non-cash goodwill impairments described in footnote 2 above.
(e) Represents other items described in Note 4(e) above.
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Free Cash Flow is a supplemental non-GAAP financial measure of liquidity and is not based on any standardized methodology prescribed by GAAP. Free Cash Flow should not be considered in isolation or as an alternative to cash flows from operating activities or other measures determined in accordance with GAAP. Also, Free Cash Flow is not necessarily comparable to similarly titled measures used by other companies.
Year Ended December 31,
(unaudited)
(dollars in millions)
Net Cash (Used in) Provided by Operating Activities $ (37.1 ) $ 67.8
Less:
Capital expenditures 4.0 3.9
Free Cash Flow $ (41.1 ) $ 63.9
Organic revenue is a supplemental non-GAAP financial measure of performance and is not based on any standardized methodology prescribed by GAAP. Organic revenue should not be considered in isolation or as an alternative to revenues or other measures determined in accordance with GAAP. Also, Organic revenues is not necessarily comparable to similarly titled measures used by other companies.
Year Ended December 31, Change
(unaudited) (dollars in millions)
Add (deduct):
Acquisition revenues (7.2 ) —
Discontinued events — (6.7 )
COVID-19 cancellations(1) — (230.6 )
Revenues
Total revenues of $127.4 million for the year ended December 31, 2020 decreased $233.5 million, or 64.7%, from $360.9 million for the year ended December 31, 2019. See “Commerce Segment – Revenues,” “Design and Technology Segment – Revenues,” and “All Other Category – Revenues” below for a discussion of the factors contributing to the changes in total revenues.
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Other Income
Total other income of $107.0 million for fiscal 2020 increased by $100.9 million, from $6.1 million for fiscal 2019. See “Commerce Segment – Cost of Revenues,” “Design and Technology Segment – Cost of Revenues” and “All Other Category – Cost of Revenues” below for a discussion of the factors contributing to the changes in total cost of revenues.
Cost of Revenues
Total cost of revenues of $57.6 million for fiscal 2020 decreased by 52.1%, or $62.6 million, from $120.2 million for fiscal 2019. See “Commerce Segment – Cost of Revenues,” “Design and Technology Segment – Cost of Revenues” and “All Other Category – Cost of Revenues” below for a discussion of the factors contributing to the changes in total cost of revenues.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses consist primarily of compensation and employee-related costs, sales commissions and incentive plans, stock-based compensation expense, marketing expenses, information technology expenses, travel expenses, facilities costs, consulting fees and public reporting costs. Total selling, general and administrative expenses of $118.6 million for the year ended December 31, 2020 decreased $14.8 million, or 11.1%, from $133.4 million for the year ended December 31, 2019. See “Commerce Segment – Selling, General and Administrative Expenses”, “Design and Technology Segment – Selling, General and Administrative Expenses”, “All Other category – Selling, General and Administrative Expenses” and “Corporate - Selling, General and Administrative Expenses” below for a discussion of the factors contributing to the changes in total selling, general and administrative expenses.
Depreciation and Amortization Expense
Total depreciation and amortization expense of $48.6 million for the year ended December 31, 2020 decreased $3.4 million, or 6.5%, from $52.0 million for the year ended December 31, 2019. See “Commerce Segment – Depreciation and Amortization Expense,” “Design and Technology Segment – Depreciation and Amortization Expense,” “All Other Category – Depreciation and Amortization Expense” and “Corporate – Depreciation and Amortization Expense” below for a discussion of the factors contributing to the changes in total depreciation and amortization expense.
Goodwill Impairments
As a result of the COVID-19 pandemic and the measures implemented to prevent its spread, during the first quarter of 2020, we determined that the COVID-19 outbreak would continue to have a material negative impact on our financial results even following the time when the outbreak is contained. These factors, as well as uncertainty around when we would be able to resume normal operations, caused a significant and prolonged decline in our stock price, resulting in our market capitalization falling below the Company’s carrying value. As a result, we determined that a triggering event occurred and performed a quantitative assessment of the Company’s fair value as of March 31, 2020. In connection with this assessment management recorded a $564.0 million non-cash charge related to the impairment of goodwill. In addition, as a result of our annual goodwill impairment assessment, management recorded an additional $39.4 million non-cash charge related to the impairment of goodwill as of October 31, 2020.
In connection with the re-evaluation of our operating segments and reporting units due to changes in our internal financial reporting structure, management performed the annual goodwill impairment assessment and recorded a $59.8 million non-cash charge related to the impairment of goodwill. The impairment consisted of the write-down of goodwill, equal to the excess carrying value of goodwill above fair value, of one or more reporting units included in our Commerce and Design and Technology segments and the All Other category. In addition, during the third quarter of 2019, we recognized a non-cash goodwill impairment charge of $9.3 million, as a result of a triggering event caused by reduced performance expectations in the current year. See “Commerce Segment – Goodwill Impairments,” “Design and Technology Segment – Goodwill Impairments” and “All Other Category—Goodwill Impairments” below for further discussion of goodwill impairments.
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Intangible Asset Impairments
Due to the triggering event in the first quarter of 2020 described above, management performed impairment assessments of our long-lived assets and indefinite-lived assets. The assessments resulted in the recognition of a non-cash impairment charge of $59.4 million, which included non-cash impairment charges for certain of our long-lived customer relationship and trade name intangible assets, and certain of our indefinite-lived trade name intangible assets of $13.2 million and $46.2 million, respectively. As a result of our annual impairment assessment as of October 31, management recorded a non-cash impairment charge of $17.4 million, which included non-cash impairment charges for certain of our long-lived customer relationship and trade name intangible assets, and certain of our indefinite-lived trade name intangible assets of $16.8 million and $0.6 million, respectively.
Due to the triggering event in the third quarter of 2019 caused by reduced performance expectations during the year, management performed impairment assessments of our long-lived assets and indefinite-lived intangible assets. These assessments resulted in the recognition of a non-cash impairment charge of $17.0 million, which included non-cash impairment charges for certain of our customer relationship intangible assets and trade name intangible assets of $8.7 million and $8.3 million, respectively. See “Commerce Segment – Intangible Asset Impairments”, “Design and Technology Segment – Intangible Asset Impairments” and “All Other Category –Intangible Asset Impairments” below for further discussion of total intangible asset impairments.
Commerce Segment
Year Ended December 31,
(dollars in millions)
Selling, general and administrative expenses 27.8 37.2 (9.4 ) (25.3 )%
Depreciation and amortization expense 21.9 26.9 (5.0 ) (18.6 )%
Intangible asset impairments 45.9 0.7 45.2 NM
Revenues
During the year ended December 31, 2020, revenues for the Commerce segment of $56.9 million decreased by $127.8 million, or 69.2% from $184.7 million for the year ended December 31, 2019. The primary driver of the decline was the cancellation of several first quarter and all but one subsequent live event scheduled in 2020 due to COVID-19. These cancelled events represented $126.2 million in prior year revenues. The remaining $1.2 million decline in revenues was primarily attributable to a decline of 3.9% for the events that staged during the first quarter as well as one event that staged in the fourth quarter of 2020, lower other marketing services revenue and several small discontinued events, offset by revenues generated by the launch of new virtual events.
Other Income
Other Income of $70.3 million was recorded for the Commerce reportable segment related to event cancellation insurance claims proceeds, of which $61.3 million was received and $9.0 million was confirmed by the insurance provider during the year ended December 31, 2020. All $9.0 million of insurance receivables as of December 31, 2020 were received in January 2021.
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During the third quarter of 2019, as a result of Hurricane Dorian, our Surf Expo and Impressions Expo Orlando (“ISS Orlando”) shows were forced to be cancelled. Emerald carries cancellation insurance to mitigate losses caused by natural disasters and received a settlement of $6.1 million to offset the lost revenues from the affected trade shows. As a result, Other income of $6.1 million attributable to the Commerce segment was recorded in the consolidated statements of loss and comprehensive loss for the year ended December 31, 2019 to recognize the amount recovered from the insurance company. We also maintained supplemental insurance to mitigate the losses of our exhibitors for out-of-pocket expenses incurred in connection with the cancelled shows. We received $10.1 million under this policy which was fully paid to participating exhibitors during 2019.
Cost of Revenues
During the year ended December 31, 2020, cost of revenues of $24.6 million for the Commerce segment decreased by $24.8 million, or 50.2%, from $49.4 million for the year ended December 31, 2019. The primary driver of the decline was the cancellation of several first quarter and all but one subsequent live event scheduled in 2020 due to COVID-19. These cancelled events represented $24.2 million in prior year cost of revenues.
Selling, General and Administrative Expenses
During the year ended December 31, 2020, selling, general and administrative expenses of $27.8 million for the Commerce segment decreased by $9.4 million or 25.3% from $37.2 million for the year ended December 31, 2019. The decrease was primarily comprised of lower compensation and employee-related costs due to a combination of permanent staff reductions and furloughs, and lower travel and promotional expenses related to the cancelled events. Lower credit card fees related to the cancelled events generated additional cost reductions.
Depreciation and Amortization Expense
Depreciation and amortization expense attributable to the Commerce segment of $21.9 million for the year ended December 31, 2020 decreased $5.0 million, or 18.6%, from $26.9 million for the year ended December 31, 2019. The decrease was due to lower amortization on the definite-lived trade name and customer relationship intangible assets which were impaired in the first and fourth quarters of 2020.
Goodwill Impairments
In the first quarter of 2020, a $340.6 million non-cash goodwill impairment charge was recorded in connection with reporting units under the Commerce segment. In addition, in relation to our annual impairment assessment we recorded an additional $26.9 million non-cash goodwill impairment charge in connection with reporting units under the Commerce segment. Refer to the consolidated goodwill impairment discussion under the heading, Goodwill Impairment, above in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion on goodwill impairment.
During 2019, we recorded a $36.3 million non-cash charge in connection with our annual goodwill assessment that was related to reporting units under the Commerce segment in connection with the re-evaluation of our internal financial reporting structure. In addition, during the third quarter of 2019, we recognized a non-cash goodwill impairment charge of $5.6 million, related to reporting units under the Commerce segment, as a result of a triggering event caused by reduced performance expectations for the year.
Intangible Asset Impairments
In connection with the triggering event in the first quarter of 2020 described above, we performed impairment assessments of long-lived assets and indefinite-lived assets and recorded non-cash impairment charges related to long-lived assets and indefinite-lived intangible assets under the Commerce segment of $6.7 million and $24.0 million, respectively. In relation to our annual impairment assessment performed as of October 31, we recorded additional non-cash impairment charges related to related to long-lived assets under the Commerce segment of $15.2 million. During 2020, we recorded total non-cash impairment charges related to long-lived assets and indefinite-lived intangible assets under the Commerce segment of $21.9 million and $24.0 million, respectively.
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In connection with the triggering event in the third quarter of 2019 described above, we performed impairment assessments of long-lived assets and indefinite-lived intangible assets and recognized a non-cash impairment charge related to indefinite-lived intangible assets under the Commerce segment of $0.7 million.
Design and Technology Segment
Year Ended December 31,
(dollars in millions)
Selling, general and administrative expenses 23.0 30.2 (7.2 ) (23.8 )%
Depreciation and amortization expense 16.4 19.2 (2.8 ) (14.6 )%
Intangible asset impairments 24.9 7.9 17.0 NM
Operating (loss) income $ (212.0 ) $ 4.7 $ (249.2 ) NM
Revenues
During the year ended December 31, 2020, revenues for the Design and Technology segment of $51.2 million decreased by $88.7 million, or 63.4%, from $139.9 million for the year ended December 31, 2019. The primary driver of the decline was the cancellation of several first quarter and substantially all subsequent live events scheduled in 2020 due to COVID-19. These cancelled events represented $86.9 million in prior year revenues. The remaining $1.8 million decline in revenues was primarily attributable to several small discontinued events and a decline of 1.0% for the events that staged during the first quarter in the Design and Technology segment, offset by revenues generated by the launch of new virtual events.
Other Income
Other Income of $32.5 million was recorded for the Design and Technology reportable segment related to event cancellation insurance claims proceeds, of which $24.8 million was received and $7.7 million was confirmed by the insurance provider during the year ended December 31, 2020. All $7.7 million of insurance receivables as of December 31, 2020 were received in January 2021.
Cost of Revenues
During the year ended December 31, 2020, cost of revenues for the Design and Technology segment of $25.7 million decreased by $28.2 million, or 52.3%, from $53.9 million for the year ended December 31, 2019. The primary driver of the decline was the cancellation of several first quarter and substantially all subsequent live events scheduled in 2020 due to COVID-19. These cancelled events represented $29.3 million in prior year cost of revenues. This decline was offset by increased costs related to live events that staged in the first quarter and the launch of several new virtual events.
Selling, General and Administrative Expenses
During the year ended December 31, 2020, selling, general and administrative expenses for the Design and Technology segment of $23.0 million decreased by $7.2 million, or 23.8%, from $30.2 million for the year ended December 31, 2019. The decrease was primarily comprised of lower promotional expenses related to the cancelled events, lower compensation and employee-related costs due to a combination of permanent staff reductions and furloughs, and lower travel. Lower credit card fees related to the cancelled events generated additional cost reductions.
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Depreciation and Amortization Expense
During the year ended December 31, 2020, depreciation and amortization expense for the Design and Technology segment of $16.4 million decreased $2.8 million, or 14.6%, from $19.2 million for the year ended December 31, 2019. The decrease was due to lower amortization on the definite-lived trade name and customer relationship intangible assets which were impaired in the first and fourth quarters of 2020.
Goodwill Impairments
In the first quarter of 2020, a $198.5 million non-cash goodwill impairment charge was recorded in connection with reporting units under the Design and Technology segment. In addition, in relation to our annual impairment assessment we recorded an additional $7.2 million non-cash goodwill impairment charge in connection with reporting units under the Design and Technology segment. Refer to the consolidated goodwill impairment discussion under the heading, Goodwill Impairment, above in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion on goodwill impairment.
During the third quarter of 2019, we recognized a non-cash goodwill impairment charge of $3.2 million, related to reporting units under the Design and Technology segment, as a result of a triggering event caused by reduced performance expectations for the year. In addition, we recorded a $20.8 million non-cash goodwill impairment charge in connection with our annual goodwill impairment assessment that was related to reporting units under the Design and Technology segment in connection with the re-evaluation of our internal financial reporting structure during 2019.
Intangible Asset Impairments
In connection with the triggering event in the first quarter of 2020, described above, we performed impairment assessments of long-lived assets and indefinite-lived assets and recorded non-cash impairment charges related to long-lived assets and indefinite-lived intangible assets under the Design and Technology segment of $5.7 million and $17.0 million, respectively. In relation to our annual impairment assessment performed as of October 31, we recorded additional non-cash impairment charges of $1.6 million and $0.6 million, in connection with long-lived assets and indefinite-lived intangible assets, respectively, under the Design and Technology segment. During 2020, we recorded total non-cash impairment charges related to long-lived assets and indefinite-lived intangible assets under the Design and Technology segment of $7.3 million and $17.6 million, respectively.
In connection with the triggering event in the third quarter of 2019 described above, we performed impairment assessments of long-lived assets and indefinite-lived intangible assets, and recognized non-cash impairment charges related to indefinite-lived trade name intangible assets, long-lived trade name and customer relationship intangible assets allocated to the Design and Technology segment of $3.6 million and $4.3 million, respectively.
All Other Category
Year Ended December 31,
(dollars in millions)
Other income 4.2 — 4.2 NM
Selling, general and administrative expenses 13.3 10.3 3.0 29.1 %
Depreciation and amortization expense 7.4 3.5 3.9 111.4 %
Intangible asset impairments 6.0 8.4 (2.4 ) (28.6 )%
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Revenues
During the year ended December 31, 2020, revenue attributable to the All Other category of $19.3 million decreased by $17.0 million, or 46.8%, from $36.3 million for the year ended December 31, 2019. The primary driver of the decline was the cancellation of several first quarter and substantially all subsequent live events scheduled in 2020 due to COVID-19. These cancelled events represented $19.3 million in prior year revenues. In addition, lower revenues from several discontinued brands and several events that staged in the first quarter contributed to the decline. These decreases were offset by incremental revenues from the G3 acquisition, which closed in November 2019.
Other Income
Other Income of $4.2 million was recorded for All Other category related to event cancellation insurance claims proceeds, of which $3.0 million was received and $1.2 million was confirmed by the insurance provider during the year ended December 31, 2020. All $1.2 million of insurance receivables as of December 31, 2020 were received in January 2021.
Cost of Revenues
During the year ended December 31, 2020, cost of revenues attributable to the All Other category of $7.3 million decreased by $9.6 million, or 56.8%, from $16.9 million for the year ended December 31, 2019. These cancelled events represented $7.7 million in prior year cost of revenues. In addition, discontinued print and digital publications contributed to the decrease in cost of revenues for the All Other category.
Selling, General and Administrative Expenses
During the year ended December 31, 2020, selling, general and administrative expenses for the All Other category of $13.3 million increased by $3.9 million, or 29.1%, from $10.3 million for the year ended December 31, 2019. The increase was primarily comprised of $4.5 million in incremental expense related to the 2019 acquisition of G3, offset by savings comprised of lower promotional expenses related to the cancelled events, lower compensation and employee-related costs due to a combination of permanent staff reductions and furloughs, and lower travel.
Depreciation and Amortization Expense
Depreciation and amortization expense for the All Other category of $7.4 million for the year ended December 31, 2020 increased $3.9 million, or 111.4%, from $3.5 million for the year ended December 31, 2019. The increase was attributable to higher long-lived intangible asset amortization related to the G3 acquisition.
Goodwill Impairments
In the first quarter of 2020, a $24.9 million non-cash goodwill impairment charge was recorded in connection with reporting units under the All Other category. In addition, in relation to our annual impairment assessment we recorded an additional $5.3 million non-cash goodwill impairment charge in connection with reporting units under the All Other category. Refer to the consolidated goodwill impairment discussion under the heading, Goodwill Impairment, above in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion on goodwill impairment.
We recorded a $2.8 million non-cash charge in connection with our annual goodwill impairment assessment that was related to reporting units under the All Other category in 2019. In addition, during the third quarter of 2019, we recognized a non-cash goodwill impairment charge of $0.4 million, related to reporting units under the All Other category, as a result of a triggering event caused by reduced performance expectations for the year.
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Intangible Asset Impairments
In connection with the triggering event in the first quarter of 2020 described above, we performed impairment assessments of long-lived assets and indefinite-lived assets and recorded non-cash impairment charges related to long-lived assets and indefinite-lived intangible assets under the All Other category of $0.8 million and $5.2 million, respectively.
In connection with the triggering event described above, we performed impairment assessments of long-lived assets and indefinite-lived intangible assets during the third quarter of 2019, and recognized non-cash impairment charges related to indefinite-lived trade name intangible assets, long-lived trade name and customer relationship intangible assets under the All Other category of $0.6 million and $7.8 million, respectively.
Corporate
Year Ended December 31,
(dollars in millions)
Selling, general and administrative expenses $ 54.5 $ 55.6 $ (1.1 ) (2.0 )%
Depreciation and amortization expense 2.9 2.5 0.4 16.0 %
Total operating expenses $ 57.4 $ 58.1 $ (0.7 ) (1.2 )%
Selling, General and Administrative Expenses
During the year ended December 31, 2020, selling, general and administrative expenses of $54.5 million for corporate-level activity decreased by $1.1 million, or 2.0%, from $55.6 million for the year ended December 31, 2019.
Depreciation and Amortization Expense
Depreciation and amortization expense relating to corporate-level activity of $2.9 million for the year ended December 31, 2020 increased 0.4 million, or 16%, from $2.5 million for the year ended December 31, 2019.
Interest Expense; Benefit from Income Taxes; Net Loss; Adjusted EBITDA; Adjusted Net Income
Interest Expense
Interest expense of $20.6 million for the year ended December 31, 2020 decreased $9.7 million, or 32%, from $30.3 million for the year ended December 31, 2019. The decrease was primarily attributable to a decrease in the variable interest rate on our Amended and Restated Term Loan Facility, for which the average rate during 2020 was 3.28%, compared to 5.02% during 2019, and a $0.2 million decrease in interest expense related to borrowings under the Amended and Restated Revolving Credit Facility.
Benefit from Income Taxes
For the years ended December 31, 2020 and 2019, we recorded a benefit from income taxes of $57.6 million and $5.0 million, respectively. The increase in our benefit from income taxes of $52.6 million for the year ended December 31, 2020 compared to the prior year was primarily attributable to the impact of goodwill impairments and operating losses incurred as a result of the COVID-19 pandemic.
Net Loss
Net loss of $633.6 million for the year ended December 31, 2020 increased $583.6 million from net loss of $50.0 million for the year ended December 31, 2019. The key drivers of the increase in net loss were the increases in non-cash goodwill and intangible asset impairment charges and lower revenue, partly offset by increases in other
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income, lower operating costs, decreased corporate overhead, lower depreciation and amortization costs, decreased interest costs and higher benefits from income taxes described above.
Adjusted EBITDA
Total Adjusted EBITDA of $71.9 million for the year ended December 31, 2020 decreased $55.9 million, or 43.7%, from $127.8 million for the year ended December 31, 2019. The decrease in Adjusted EBITDA was primarily attributable to the $583.6 million increase in net loss described above, an increase in the deduction for benefits from income taxes of $52.6 million and decreases in addbacks of $9.7 million for interest expense and $3.4 million for depreciation and amortization. These decreases were partially offset by benefits from the increase in combined non-cash goodwill and intangible asset impairment charges addback of $594.1 million.
Adjusted EBITDA is a financial measure that is not calculated in accordance with GAAP. For a discussion of our presentation of Adjusted EBITDA, see footnote 4 to the table under the heading “Results of Operations - Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019”.
Adjusted Net Income
Adjusted Net Income for the year ended December 31, 2020 of $40.4 million decreased $26.9 million, or 40.0%, from $67.3 million for the year ended December 31, 2019. The drivers of the decrease in Adjusted Net Income were the same as those for the decrease in Adjusted EBITDA. In addition, Adjusted Net Income declined as a result of the absence of add-backs for interest and depreciation and amortization expenses. Adjusted Net Income benefited from a $15.7 million increase in the tax effect of non-GAAP adjustments versus the prior year.
Adjusted Net Income is a financial measure that is not calculated in accordance with GAAP. For a discussion of our presentation of Adjusted Net Income, see footnote 5 to the table under the heading “Results of Operations - Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019.”
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Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018
The tables in this section summarize key components of our results of operations for the periods indicated.
Year Ended December 31,
(dollars in millions)
Statement of (loss) income and comprehensive (loss) income data:
Other income 6.1 — 6.1 NM
Depreciation and amortization expense 52.0 46.8 5.2 11.1 %
Goodwill impairments(2) 69.1 — 69.1 NM
Benefit from income taxes (5.0 ) (8.3 ) 3.3 (39.8 %)
Net loss and comprehensive loss $ (50.0 ) $ (25.1 ) $ (24.9 ) 99.2 %
Other financial data (unaudited):
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Year Ended December 31,
(unaudited)
(dollars in millions)
Add (Deduct):
Benefit from income taxes (5.0 ) (8.3 )
Goodwill impairments(a) 69.1 —
Intangible asset impairment(b) 17.0 104.3
Depreciation and amortization expense 52.0 46.8
Stock-based compensation expense(c) 7.7 6.1
Deferred revenue adjustment(d) 0.3 0.8
Other items(e) 6.4 9.2
(a) Represents the non-cash goodwill impairments described in footnote 2 above.
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Year ended December 31
(unaudited)
(dollars in millions)
Add (Deduct):
Stock-based compensation expense(a) 7.7 6.1
Deferred revenue adjustment(b) 0.3 0.8
Goodwill impairments(c) 69.1 —
Intangible asset impairment(d) 17.0 104.3
Other items(e) 6.4 9.2
Amortization of deferred financing fees and discount 1.4 1.7
Amortization of acquired intangible assets(f) 49.6 44.6
Tax adjustments related to non-GAAP adjustments(g) (34.2 ) (41.4 )
(c) Represents the non-cash goodwill impairments described in footnote 2 above.
(e) Represents other items described in Note 4(e) above.
Year Ended December 31,
(unaudited)
(dollars in millions)
Net Cash Provided by Operating Activities $ 67.8 $ 103.9
Less:
Capital expenditures 3.9 3.5
Organic revenue is a financial measure that is not calculated in accordance with GAAP. For a discussion of our presentation of Organic revenue, see footnote 6 to the table under the heading “Results of Operations - Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019.”
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Year Ended December 31, Change
(unaudited) (dollars in millions)
Add (deduct):
Acquisition revenues (10.2 ) -
Discontinued events - (11.7 )
Revenues
Total revenues of $360.9 million for the year ended December 31, 2019 decreased $19.8 million, or 5.2%, from $380.7 million for the year ended December 31, 2018. See “Commerce Segment – Revenues,” “Design and Technology Segment – Revenues,” and “All Other Category – Revenues” below for a discussion of the factors contributing to the changes in total revenues.
Cost of Revenues
Total cost of revenues of $120.2 million for fiscal 2019 increased by 7.2%, or $8.1 million, from $112.1 million for fiscal 2018. See “Commerce Segment – Cost of Revenues,” “Design and Technology Segment – Cost of Revenues” and “All Other Category – Cost of Revenues” below for a discussion of the factors contributing to the changes in total cost of revenues.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses consist primarily of compensation and employee-related costs, sales commissions and incentive plans, stock-based compensation expense, marketing expenses, information technology expenses, travel expenses, facilities costs, consulting fees and public reporting costs. Total selling, general and administrative expenses of $133.4 million for the year ended December 31, 2019 increased $11.6 million, or 9.5%, from $121.8 million for the year ended December 31, 2018. See “Commerce Segment – Selling, General and Administrative Expenses”, “Design and Technology Segment – Selling, General and Administrative Expenses”, “All Other category – Selling, General and Administrative Expenses” and “Corporate - Selling, General and Administrative Expenses” below for a discussion of the factors contributing to the changes in total selling, general and administrative expenses.
Depreciation and Amortization Expense
Total depreciation and amortization expense of $52.0 million for the year ended December 31, 2019 increased $5.2 million, or 11.1%, from $46.8 million for the year ended December 31, 2018. See “Commerce Segment – Depreciation and Amortization Expense,” “Design and Technology Segment – Depreciation and Amortization Expense,” “All Other Category – Depreciation and Amortization Expense” and “Corporate – Depreciation and Amortization Expense” below for a discussion of the factors contributing to the changes in total depreciation and amortization expense.
Goodwill Impairments
In connection with the re-evaluation of our operating segments and reporting units due to changes in our internal financial reporting structure, management performed the annual goodwill impairment and recorded a $59.8
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million non-cash charge related to the impairment of goodwill. The impairment consisted of the write-down of goodwill, equal to the excess carrying value of goodwill above fair value, of one or more reporting units included in our Commerce and Design and Technology segments and the All Other category. In addition, during the third quarter of 2019, we recognized a non-cash goodwill impairment charge of $9.3 million, as a result of a triggering event caused by reduced performance expectations in the current year. See “Commerce Segment – Goodwill Impairments,” “Design and Technology Segment – Goodwill Impairments” and “All Other Category—Goodwill Impairments” below for further discussion of goodwill impairments.
Intangible Asset Impairments
Due to the triggering event described above, management performed impairment assessments of our long-lived assets and indefinite-lived intangible assets during the third quarter of 2019. These assessments resulted in the recognition of a non-cash impairment charge of $17.0 million, which included non-cash impairment charges for certain of our customer relationship intangible assets and trade name intangible assets of $8.7 million and $8.3 million, respectively. During the year ended December 31, 2018, we recorded a $104.3 million non-cash impairment charge related to certain of its trade names and customer relationship intangible assets. The impairment charge was due to a decline in fair value compared to the carrying value of the respective trade names and customer relationship intangible assets, which were driven by changes in forecasted revenues and gross profits and minor adjustments to the valuation assumptions around future royalty and discount rates. See “Commerce Segment – Intangible Asset Impairments”, “Design and Technology Segment – Intangible Asset Impairments” and “All Other Category –Intangible Asset Impairments” below for further discussion of total intangible asset impairments.
Commerce Segment
Year Ended December 31,
(dollars in millions)
Other income 6.1 — 6.1 NM
Selling, general and administrative expenses 37.2 37.7 (0.5 ) (1.3 )%
Depreciation and amortization expense 26.9 25.1 1.8 7.2 %
Goodwill impairments 41.9 — 41.9 NM
Intangible asset impairments 0.7 58.4 (57.7 ) NM
Revenues
During the year ended December 31, 2019, revenues for the Commerce segment of $184.7 million decreased by $31.2 million, or 14.5% from $215.9 million for the year ended December 31, 2018. The decrease was related to discontinued events of $11.0 million, which were primarily driven by the decision to cancel the 2019 Outdoor Retailer Winter Market and combine it with the January 2020 Outdoor Retailer Snow Show, as well as the decision not to stage Interbike 2019. In addition, Commerce revenues declined by $7.1 million as a result of the cancellation of Surf Expo and ISS Orlando due to Hurricane Dorian. We recorded the $6.1 million cancellation insurance settlement related to these events as Other income in the Commerce segment during the year. The remaining $13.1 million decline was primarily attributable to organic decreases which were driven by a 7.8% year-over-year decline in net square footage of exhibit space (“NSF”) sold, which was slightly offset by a 1.8% increase in yield.
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Other Income
During the third quarter of 2019, as a result of Hurricane Dorian, our Surf Expo and Impressions Expo Orlando (“ISS Orlando”) shows were forced to be cancelled. Emerald carries cancellation insurance to mitigate losses caused by natural disasters and received a settlement of $6.1 million to offset the lost revenues from the affected trade shows. As a result, Other income of $6.1 million attributable to the Commerce segment was recorded in the consolidated statements of loss and comprehensive loss for the year ended December 31, 2019 to recognize the amount recovered from the insurance company. We also maintained supplemental insurance to mitigate the losses of our exhibitors for out-of-pocket expenses incurred in connection with the cancelled shows. We received $10.1 million under this policy which was fully paid to participating exhibitors during 2019.
Cost of Revenues
During the year ended December 31, 2019, cost of revenues of $49.4 million for the Commerce segment decreased by $0.5 million, or 1.0%, from $49.9 million for the year ended December 31, 2018. The decrease was related to savings on discontinued events of $3.1 million as well as $1.0 million in savings related to the cancellation of Surf Expo and ISS Orlando. These declines were partially offset by incremental costs of our 2019 show-improvement initiatives, which were focused on several of our largest brands within the Commerce segment.
Selling, General and Administrative Expenses
During the year ended December 31, 2019, selling, general and administrative expenses of $37.2 million for the Commerce segment decreased by $0.5 million or 1.3% from $37.7 million for the year ended December 31, 2018.
Depreciation and Amortization Expense
Depreciation and amortization expense attributable to the Commerce segment of $26.9 million for the year ended December 31, 2019 increased $1.8 million, or 7.2%, from $25.1 million for the year ended December 31, 2018. The increase was due to additional amortization on the trade name intangible assets for which we adjusted the estimated useful life in the fourth quarter of 2018, offset by lower amortization for brands that were fully written off in the prior year.
Goodwill Impairments
We recorded a $36.3 million non-cash charge in connection with our annual goodwill assessment that was related to reporting units under the Commerce segment in connection with the re-evaluation of our internal financial reporting structure during 2019. In addition, during the third quarter of 2019, we recognized a non-cash goodwill impairment charge of $5.6 million, related to reporting units under the Commerce segment, as a result of a triggering event caused by reduced performance expectations for the year.
Intangible Asset Impairments
In connection with the triggering event described above, we performed impairment assessments of long-lived assets and indefinite-lived intangible assets during the third quarter of 2019, and recognized a non-cash impairment charge related to indefinite-lived intangible assets under the Commerce segment of $0.7 million. During the year ended December 31, 2018, we also recorded a $58.4 million non-cash impairment charge related to certain of our trade names and customer relationship intangible assets under the Commerce segment. The impairment charge was due to a decline in fair value compared to the carrying value of the respective trade names and customer relationship intangible assets, which were driven by changes in forecasted revenues and gross profits and minor adjustments to the valuation assumptions around future royalty and discount rates.
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Design and Technology Segment
Year Ended December 31,
(dollars in millions)
Selling, general and administrative expenses 30.2 25.0 5.2 20.8 %
Depreciation and amortization expense 19.2 14.9 4.3 28.9 %
Goodwill impairments 24.0 — 24.0 NM
Intangible asset impairments 7.9 16.2 (8.3 ) NM
Revenues
During the year ended December 31, 2019, revenues for the Design and Technology segment of $139.9 million increased by $12.1 million, or 9.5%, from $127.8 million for the year ended December 31, 2018. The increase was related to incremental revenues of $10.2 million from our 2018 acquisitions of the Technology Brands and BDNY (collectively, the “2018 acquisitions”) and organic growth of $3.9 million which was driven by a 2.8% increase in yield, partially offset by a 1.2% decline in net square feet. These increases were further offset by a $0.6 million decline related to several small discontinued events.
Cost of Revenues
During the year ended December 31, 2019, cost of revenues for the Design and Technology segment of $53.9 million increased by $7.1 million, or 15.2%, from $46.8 million for the year ended December 31, 2018. The increase reflected $4.2 million in incremental expense related to the 2018 acquisitions and $3.5 million related to incremental costs of shows that grew during the year, as well as the additional costs of our 2019 show-improvement initiatives, which focused on several of our largest brands within the Design and Technology segment. These increases were partially offset by $0.6 million in savings related to several small discontinued events.
Selling, General and Administrative Expenses
During the year ended December 31, 2019, selling, general and administrative expenses for the Design and Technology segment of $30.2 million increased by $5.2 million, or 20.8%, from $25.0 million for the year ended December 31, 2018. The increase was primarily comprised of $5.0 million in incremental expense related to the 2018 acquisitions.
Depreciation and Amortization Expense
During the year ended December 31, 2019, depreciation and amortization expense for the Design and Technology segment of $19.2 million increased $4.3 million, or 28.9%, from $14.9 million for the year ended December 31, 2018. The increase was primarily attributable to incremental amortization related to the 2018 acquisitions as well as increased amortization on the trade name intangible assets for which we adjusted the estimated useful life in the fourth quarter of 2018.
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Goodwill Impairments
We recorded a $20.8 million non-cash charge in connection with our annual goodwill impairment assessment that was related to reporting units under the Design and Technology segment in connection with the re-evaluation of our internal financial reporting structure during 2019. In addition, during the third quarter of 2019, we recognized a non-cash goodwill impairment charge of $3.2 million, related to reporting units under the Design and Technology segment, as a result of a triggering event caused by reduced performance expectations for the year.
Intangible Asset Impairments
Due to the triggering event described above, we performed impairment assessments of long-lived assets and indefinite-lived intangible assets during the third quarter of 2019, and recognized non-cash impairment charges related to indefinite-lived trade name intangible assets, long-lived trade name and customer relationship intangible assets allocated to the Design and Technology segment of $3.6 million and $4.3 million, respectively. During the year ended December 31, 2018, we recorded a $16.2 million non-cash impairment charge related to certain trade names and customer relationship intangible assets allocated to the Design and Technology segment. The impairment charge was due to a decline in fair value compared to the carrying value of the respective trade names and customer relationship intangible assets, which were driven by changes in forecasted revenues and gross profits and minor adjustments to the valuation assumptions around future royalty and discount rates.
All Other Category
Year Ended December 31,
(dollars in millions)
Selling, general and administrative expenses 10.3 9.6 0.7 7.3 %
Depreciation and amortization expense 3.5 4.6 (1.1 ) (23.9 %)
Goodwill impairments 3.2 — 3.2 NM
Intangible asset impairments 8.4 29.7 (21.3 ) NM
Operating loss $ (6.0 ) $ (21.7 ) $ 15.7 NM
Revenues
During the year ended December 31, 2019, revenue attributable to the All Other category of $36.3 million decreased by $0.7 million, or 1.9%, from $37.0 million for the year ended December 31, 2018. The decrease was related to an organic decline of $1.8 million, which was partially offset by incremental revenues of $1.2 million from our 2019 acquisition of G3.
Cost of Revenues
During the year ended December 31, 2019, cost of revenues for the All Other category increased by $2.1 million, or 14.2%, from $14.8 million for the year ended December 31, 2018. The increase primarily reflected incremental costs of our 2019 show-improvement initiatives.
Selling, General and Administrative Expenses
During the year ended December 31, 2019, selling, general and administrative expenses for the All Other category of $10.3 million increased by $0.7 million, or 7.3%, from $9.6 million for the year ended December 31, 2018. The increase was primarily comprised of $0.8 million in incremental expense related to the 2019 acquisition of G3.
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Depreciation and Amortization Expense
Depreciation and amortization expense for the All Other category of $3.5 million for the year ended December 31, 2019 decreased $1.1 million, or 23.9%, from $4.6 million for the year ended December 31, 2018. The decrease was attributable to lower amortization for brands that were fully written off in the prior year.
Goodwill Impairments
We recorded a $2.8 million non-cash charge in connection with our annual goodwill impairment assessment that was related to reporting units under the All Other category. In addition, during the third quarter of 2019, we recognized a non-cash goodwill impairment charge of $0.4 million, related to reporting units under the All Other category, as a result of a triggering event caused by reduced performance expectations for the year.
Intangible Asset Impairments
Due to the triggering event described above, we performed impairment assessments of long-lived assets and indefinite-lived intangible assets during the third quarter of 2019, and recognized non-cash impairment charges related to indefinite-lived trade name intangible assets, long-lived trade name and customer relationship intangible assets under the All Other category of $0.6 million and $7.8 million, respectively. During the year ended December 31, 2018, we recorded a $29.7 million non-cash impairment charge related to certain trade names and customer relationship intangible assets allocated to the All Other category. The impairment charge was due to a decline in fair value compared to the carrying value of the respective trade names and customer relationship intangible assets, which were driven by changes in forecasted revenues and gross profits and minor adjustments to the valuation assumptions around future royalty and discount rates.
Corporate
Year Ended December 31,
(dollars in millions)
Selling, general and administrative expenses $ 55.6 $ 49.5 $ 6.1 12.3 %
Depreciation and amortization expense 2.5 2.2 0.3 13.6 %
Selling, General and Administrative Expenses
During the year ended December 31, 2019, selling, general and administrative expenses of $55.6 million for corporate-level activity increased by $6.1 million, or 12.3%, from $49.5 million for the year ended December 31, 2018. The increase was primarily comprised of incremental expense related to new senior management costs and incremental investments in 2019 and future events.
Depreciation and Amortization Expense
Depreciation and amortization expense relating to corporate-level activity of $2.5 million for the year ended December 31, 2019 increased $0.3 million, or 13.6%, from $2.2 million for the year ended December 31, 2018.
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Interest Expense; Benefit from Income Taxes; Net Loss; Adjusted EBITDA; Adjusted Net Income
Interest Expense
Interest expense of $30.3 million for the year ended December 31, 2019 increased $1.2 million, or 4.1%, from $29.1 million for the year ended December 31, 2018. The increase was primarily attributable to an increase in the variable interest rate on our Amended and Restated Term Loan Facility, for which the average rate during 2019 was 5.02%, compared to 4.76% during 2018, and a $0.5 million increase in interest expense related to borrowings under the Amended and Restated Revolving Credit Facility attributable to higher outstanding indebtedness during 2019.
Benefit from Income Taxes
For the years ended December 31, 2019 and 2018, we recorded a benefit from income taxes of $5.0 million and $8.3 million, respectively. The decrease in our benefit from income taxes of $3.1 million for the year ended December 31, 2019 compared to the prior year was primarily attributable to the tax effect of goodwill impairments that are not deductible, and to a lesser extent, the relative mix of operations in and among various U.S. state and local jurisdictions, partially offset by the increase in loss before income taxes in 2019.
Net Loss
Net loss of $50.0 million for the year ended December 31, 2019 increased $24.9 million, or 99.2%, from net loss of $25.1 million for the year ended December 31, 2018. The key drivers of the increase in net loss were the declines in organic revenues, higher operating costs, increased corporate overhead and lower benefits from income taxes described above. These declines were partly offset by lower combined non-cash goodwill and intangible asset impairment charges.
Adjusted EBITDA
Total Adjusted EBITDA of $127.8 million for the year ended December 31, 2019 decreased $35.1 million, or 21.5%, from $162.9 million for the year ended December 31, 2018. The decrease in Adjusted EBITDA was primarily attributable to the $25.0 million increase in net loss described above and $17.9 million lower combined non-cash goodwill and intangible asset impairment charges. These decreases were partially offset by benefits from the increase in depreciation and amortization addback of $5.3 million and the decrease of $3.1 million in the deduction for benefit from income taxes. Adjusted EBITDA is a financial measure that is not calculated in accordance with GAAP. For a discussion of our presentation of Adjusted EBITDA, see footnote 4 to the table under the heading “Results of Operations - Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019.”
Adjusted Net Income
Adjusted Net Income for the year ended December 31, 2019 of $67.3 million decreased $32.9 million, or 32.8%, from $100.2 million for the year ended December 31, 2018. The drivers of the decrease in Adjusted Net Income were the same as those for the decrease in Adjusted EBITDA. In addition, Adjusted Net Income declined as a result of the absence of higher add-backs for interest and depreciation and amortization expenses. Adjusted Net Income benefited from a $7.2 million decline in the tax effect of non-GAAP adjustments versus the prior year.
Adjusted Net Income is a financial measure that is not calculated in accordance with GAAP. For a discussion of our presentation of Adjusted Net Income, see footnote 5 to the table under the heading “Results of Operations - Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019.”
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, other commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and their sufficiency to fund our operating and investing activities.
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In March 2020, the World Health Organization categorized the Coronavirus Disease 2019 (“COVID-19”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. In conjunction with this declaration and the spread of COVID-19 across the United States, recommendations and mandates were handed down by various local, state and federal government agencies regarding social distancing, containment areas and against large gatherings. In addition, travel restrictions were imposed by the United States and foreign governments, and by companies with respect to their employees, and various event venues announced indefinite closures. As a result of these and various other factors, management made the decision to cancel nearly all ofour face-to-face events scheduled through the end of 2020. In addition, beginning in October 2020 management announced the cancellation or postponement of several live events that were scheduled for the first half of 2021. The ongoing effects of COVID-19 on our operations and event calendar have had, and will continue to have, a material negative impact on its financial results and liquidity, and such negative impact may continue beyond the containment of such outbreak.
The assumptions used to estimate the our liquidity are subject to greater uncertainty because we have never previously cancelled or postponed all upcoming events for a period of multiple months due to a pandemic where the timing for resolution and ultimate impact of the pandemic remains uncertain. Management cannot at present estimate with certainty (i) when we will be able to resume full or partial event operations and, once resumed, (ii) whether event exhibitors and attendees will attend our events. Therefore, current estimates of revenues and the associated impact on liquidity could differ materially in the future. Therefore, current estimates of revenues and the associated impact on liquidity could differ materially in the future. As a consequence, management cannot estimate with a high degree of certainty the ultimate impact on our business, financial condition or near or longer term financial or operational results. During the year ended December 31, 2020, we implemented several actions to preserve cash and strengthen our liquidity position, including, but not limited to:
• Reducing our expense structure across all key areas of discretionary spending;
• Significantly reducing the use of outside contractors;
• Suspending the regular quarterly cash dividend.
Further, Emerald maintains event cancellation insurance to protect against losses due to the unavoidable cancellation, postponement, relocation and enforced reduced attendance at events due to certain covered events. Specifically, Emerald is insured for losses due to event cancellations caused by the outbreak of communicable diseases, including COVID-19.
The aggregate limit under these event cancellation insurance policies is approximately $191.1 million in 2020 and $191.4 million in 2021 if losses arise for reasons within the scope of this policy. In addition to this primary policy, Emerald maintains a separate event cancellation insurance policy for the Surf Expo Summer 2020 and Surf Expo Winter 2021 shows, with a coverage limit of $6.0 million and $7.7 million, for each respective event.
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We are in the process of pursuing claims under these insurance policies to offset the financial impact of cancelled and postponed events as a result of COVID-19. During the year ended December 31, 2020, we recorded Other income of $107.0 millionrelated to event cancellation insurance claim proceeds deemed to be realizable by management. Of the $107.0 million in other income, $89.2 million was received in 2020 and $17.8 million was received in January 2021. These proceeds represent an interim payment in respect of the $167.4million in event cancellation insurance claims filed in relation to events cancelled during the year ended December 31, 2020. These claims are subject to review and adjustment. There is no guarantee or assurance as to the amount or timing of future recoveries from Emerald’s event cancellation insurance policy.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which provides for the ability of employers to delay payment of employer payroll taxes during 2020 after the date of enactment. As a result, the payment approximately $2.0 million of our employer payroll taxes otherwise due in 2020 will be delayed, with 50% due by December 31, 2021 and the remaining 50% due by December 31, 2022.
As of December 31, 2020, we had $525.2 million of borrowings outstanding under the Amended and Restated Term Loan Facility, which included unamortized deferred financing fees of $2.0 million and unamortized original issue discount of $2.5 million, with an additional $149.0 million available to borrow (after giving effect to $1.0 million letters of credit outstanding) under the Amended and Restated Revolving Credit Facility. Borrowings under our Amended and Restated Term Loan Facility are subject to mandatory prepayments under specified circumstances, including 50.0% of Excess Cash Flow, subject to step-downs to 25% and 0% of excess cash flow at certain leverage based thresholds, and with 100% of the net cash proceeds of asset sales and casualty events in excess of certain thresholds (subject to certain reinvestment rights). If these thresholds are triggered, we would be required to make these mandatory prepayments. See “--Long-Term Debt-Amended and Restated Senior Secured Credit Facilities” below for more detail regarding the terms of our Amended and Restated Senior Secured Credit Facilities.
Dividend Policy
We paid a dividend of $0.07 per share in each of the second, third and fourth quarters of 2017 and the first quarter of 2018 and $0.0725 per share in each of the second, third and fourth quarters of 2018. We paid a dividend of $0.0725 per share in first quarter of 2019 and $0.0750 per share in each of the second, third and fourth quarters of 2019 and first quarter of 2020. On March 20, 2020, due to the negative impact of COVID-19 on our business, our Board of Directors temporarily suspended the Company’s regular quarterly cash dividend on its common stock. The payment of any such dividend in future quarters is subject to the discretion of our board of directors and depending upon our results of operations, cash requirements, financial condition, contractual restrictions, restrictions imposed by applicable laws and other factors that our board of directors may deem relevant, and the amount of any future dividend payment may be changed or terminated in the future at any time and for any reason without advance notice.